Cyprus has temporarily staved off fiscal disaster by agreeing to terms on a €10b bailout package, but many high net-worth individuals and companies – including some connected with well-known US-facing online gambling outfits – are being asked to bear much of the burden, which could have disastrous consequences for these companies’ customers.
Ten days ago, the Cyprus government caused an outrage by proposing a 6.75% levy on all bank accounts under €100k and a 10% levy on accounts over €100k in order to raise €5.8b to qualify for another bailout put together by the International Monetary Fund, the European Commission and the European Central Bank. Cypriots were outraged, as EU law maintains that deposits up to €100k are supposed to be insured from financial upheavals. So Cypriots took to the streets and the nation’s parliamentarians refused to approve the plan.
The new plan doesn’t touch deposits under €100k, but the government will now take as much as 40% of uninsured deposits above €100k in order to raise about €4.2b. Laiki, Cyprus’ second largest bank, is effectively history. All Laiki accounts containing less than €100k will be transferred over to the country’s biggest bank, the Bank of Cyprus, while Laiki will limp on as a toxic wasteland of bad assets and uninsured deposits. Deposits over €100k in the Bank of Cyprus will be frozen until the government decides how much cream will need to be skimmed off the top.
In recent years, Cyprus built a reputation as a financial safe haven of low taxes and minimum regulation. This attracted significant investment by high net-worth companies and individuals (primarily Russian and British), many of whom now face massive haircuts on their uninsured deposits. Banks in Cyprus have been closed for the past week and capital controls will be imposed to prevent a run on the banks when they reopen on Tuesday.
Some significant US-facing online gambling affiliates also kept their cash in Cyprus. A major check provider for a US-facing online sportsbook reportedly had 90% of its funding accounts in Cyprus, so any customer who thinks they’re being slow-paid now ain’t seen nothing yet. One of the industry’s most prevalent debit card payout programs also had significant exposure to financial institutions in Cyprus. The race is on to find alternative banking relationships.
Even if these companies manage to survive this blow, the cost of doing business is about to go up. As Bwin.party CEO Norbert Teufelberger noted in his company’s recent annual report, the company dealt with the new 5% turnover tax imposed in its biggest market (Germany) mainly by passing on the cost to its customers. US punters dealing with international sites should brace themselves for similar treatment.