European stock markets have fallen on concerns that a levy on bank deposits in Cyprus, designed to re-capitalise the island and its overstretched banking system and termed a ‘bail in’, could reactive the eurozone crisis.
Cyprus’s recently-elected president, Nicos Anastasiades said that the tax on savings was the only way of averting catastrophe as two Cypriot banks could otherwise run out of money within days and force Cyprus into a default. The traditional taxpayer-funded bail-out option was not possible, as Germany did not want to commit its taxpayers’ money to funding yet another southern European country.
In addition, the large amount of Russian money in Cyprus, much of it allegedly being laundered, promoted the strict ‘bail in’ conditions, with savers losing up to 10% but getting bank shares in return.
President Anastasiades is seeking parliamentary support for a €10bn assistance package agreed with the European Union (EU) and the International Monetary Fund (IMF), for which one of the terms was a tax on savings held in Cyprus bank accounts. Banks on the island are closed to today and there are fears that Cypriots will attempt to withdraw their savings once they reopen after a few days’ holiday.
Anastasiades announced that he was in talks and would attempt to limit the bailout’s effect on smaller savers, but stressed there was little other choice to save Cyprus after its banks took huge losses from the debt write-down in Greece.
“We would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis,” he said in a statement.
Under the terms of the package agreed in Brussels before the weekend, a financial burden is placed directly on Cypriot citizens, with a levy of 6.75% deducted on banks deposits of up to €100,000 and 9.9% on totals of more than €100,000.
Cypriots queued outside ATMs across the island at the weekend, but many were unable to withdraw their money. Although the government denied the machines had been disabled, a leaked document from the Central Bank of Cyprus published on a local news website suggested that credit institutions had been ordered to freeze all transfers until further notice.
Not surprisingly Vladimir Putin and other Russian leaders have criticised the move, which was taken by the EU without Moscow being consulted. Reports suggest that Russian depositors stand to lose up to €2bn as a result of the levy.
A spokesman for Putin said that the Russian president regarded the levy as “unfair, unprofessional and dangerous”, while Russia’s finance minister, Anton Siluanov, also criticised the EU’s actions. “The decision on the tax on deposits, in our opinion, is not fair becuase the problems of the banking supervision and regulation are passed on to investors,” he said, adding: “I don’t pity our businessmen.”
“We had an agreement with our EU colleagues that we would take co-ordinated action. Our role was to possibly relax the terms for Cyprus paying back its credit. As it turns out, the EU took action to levy a tax on deposits without consulting Russia, and for this reason we will further consider our participation from the point of view of restructuring the earlier loan.”
The bailout package has gathered some support however; principally from the Cypriot business community. “I can’t even conceive of the size of the catastrophe we face if we don’t vote in favour of the package,” said Nikos Shacolas, chairman of the Shacolas Group, whose operations in Cyprus and Greece span retail, distribution and logistics, telecommunications and real estate.
A unique case?
Luciano Janelli, chief economist at MIG Bank, said that the EU has stressed that Cyprus will remain a unique case as the island’s banking sector is five times the national economy. “In fact, if the EU/IMF would have had to provide the whole €17bn, the country’s debt ratio would have exploded and become potentially unsustainable – €17bn equals 100% of Cyprus gross domestic product [GDP].
“Also, unlike in other countries, banks have issued little bonds such that a haircut on bonds would bring little additional relief. Thus, it makes sense to charge bank deposist which, to a large extent, are in the hands of wealthy Russian clients. This way, Cypriot taxpayers [citizens] ultimately pay much less.”
Janelli added that the key long-term risk from the episode is a crisis of confidence in the banking sectors of Cyprus’s other periphery countries.
“This is unlikely because significant bank account withdrawals so far happened only in Greece, without contagion to other periphery countries,” he suggested.
“Yet one could turn around the ‘size’ argument: if the EU is unwilling to fully bail out Cyprus – which represents 0.2% of overall EU GDP – why would it bail out bank sectors in much bigger countries, such as Spain and Italy?”
Janelli concludes that the “unique character” of this case is likely to prevail and that if the US produces positive housing market data this week it has the potenial to turn markets around again. “Yet the EU has entered a totally new chapter; i.e. a bail-in of bank depositors. So although Cyprus looks very unique, it is appropriate to stay on the alert.”
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