Analysis: Cyprus bank levy risks dangerous euro zone precedent

LONDON Sun Mar 17, 2013 12:55pm EDT

A man withdraws money from an automatic teller machine at a branch of Bank of Cyprus, in Athens March 16, 2013. REUTERS/Yannis Behrakis

A man withdraws money from an automatic teller machine at a branch of Bank of Cyprus, in Athens March 16, 2013.

Credit: Reuters/Yannis Behrakis

LONDON (Reuters) - A hit imposed on Cypriot bank depositors by the euro zone has shocked and alarmed politicians and bankers who fear the currency bloc has set a precedent that will unnerve investors and citizens alike.

After all-night Friday talks, euro finance ministers agreed a 10 billion euro ($13 billion) bailout for the stricken Mediterranean island and said since so much of its debt was rooted in its banks, that sector would have to bear a large part of the burden.

In a radical departure from previous aid packages - and one that gave rise to incredulity and anger across Cyprus - the ministers are forcing the nation's savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.

The European Central Bank's pledge to buy euro zone government bonds in unlimited amounts if needed has calmed the beleaguered currency bloc for the past five months. But if investors fear the Cypriot template could be repeated in any future rescues, that calm could be shattered.

Without a bailout, Cyprus would default, which could unravel the investor confidence fostered by the ECB.

Politicians, bankers and analysts said the levy could undermine banks in other euro zone countries, even though the ministers insisted it was a one-off and Cyprus represents just 0.2 percent of euro zone economic output.

"The unprecedented move is an extreme measure, and in our view it will spread some panic across the EMU periphery, and we cannot rule out some capital outflows," said Annalisa Piazza at Newedge Strategy.

"In the short run we expect some effects on periphery's (bond yield) spreads and some weakening of the euro cannot be ruled out," Piazza said.

The decision sent Cypriots scurrying to the cash points, most of which were emptied within hours. Most have been unable to access their bank accounts since Saturday morning, a move unlikely to engender calm.

Euro zone policymakers made a point of saying they would monitor any signs of money moving out of Cyprus but did not say how they might react in the event.

"For us, Cyprus is systemically relevant. Despite the small size of the economy, disorderly developments in Cyprus could undermine the important progress made in 2012 in stabilizing the euro zone," ECB policymaker Joerg Asmussen said after the Eurogroup meeting concluded before dawn on Saturday.

A Cypriot bank holiday on Monday will limit any immediate reaction. The deposit levy - set at 9.9 percent on bank deposits exceeding 100,000 euros and 6.7 percent on anything below that - will be imposed on Tuesday, if voted through in parliament.

That is not certain to happen, but fear of the alternative - probable default - will focus minds.

Cyprus's parliament postponed until Monday an emergency session to discuss the levy, which President Nicos Anastasiades urged lawmakers to support. Three parties in the 56-member chamber, where no party has an absolute majority, have already said they will not back the plan.

"The government can be reasonably confident of only around 26-28 votes at the most, while the opposition may be confident of around 26," said JPMorgan analyst Alex White. "Our best estimates of a potential vote have it too close to call at this stage."

Beyond Cyprus's borders, there was little sign of public alarm, and banks and state authorities were quick to offer reassurance.

Bank of Cyprus and Laiki Bank put messages on their British websites to assure depositors that the levy does not apply to Cypriot banks overseas. The Bank of Spain said there were no signs of capital flight from Spain.

"The scope of potential contagion to other peripheral countries in terms of deposit outflows and sovereign debt is considerably more limited than if such a decision would have been taken in previous programs," analysts at Barclays said in a note. "We consider the likelihood of a bank run in other periphery countries to be limited, including in Greece."

Ireland's finance ministry said the levy was a one-off measure for Cyprus that had no implications for Irish deposit holders.

"APPALLED"

But outside euro zone policymaking circles there was considerable disquiet.

"I understand that electorates in Germany and northern Europe demand some sacrifice. However, when you accept a solution that basically expropriates 10 percent of deposits, you set a dangerous precedent," Vladimir Dlouhy, former Czech economy minister and now international advisor for Goldman Sachs told Reuters in Berlin. "If we get into deeper trouble, God help us, they may try to take 50 percent."

Spain is a good test case for any contagion.

Latest figures from the ECB showed deposits were stable in Spain in January. Spain's banks are awash with liquidity after receiving 40 billion euros from a European rescue last year, and the government is borrowing easily from the market, so is nowhere near seeking a bailout.

But ordinary bank account holders may not necessarily take comfort from such facts.

The International Monetary Fund urged the bloc on Friday to press ahead with a common deposit guarantee scheme to banish any threat of a bank run. That has been a red line for EU paymaster Germany.

"The Cypriot bailout terms can't be viewed in isolation. The signals sent to troubled euro zone countries and to foreign depositors are unmistakable. While this isn't a Lehman moment, the same lack of systemic concerns is evident," said Simon Evenett, professor of international trade at St Gallen University in Switzerland.

Sharon Bowles, chair of the European Parliament's Economic and Monetary Affairs Committee, said she was appalled.

"Deposit guarantees were brought in ... so that citizens across the EU would not have incentives to move funds from country to country. That has now been blown apart," she said in a statement. "If this were a bank they would be in court for mis-selling."

Much of the money in Cypriot banks belongs to Russians and Britons. Though there was no protest from London or Moscow, there was no shortage from elsewhere.

"Although the representatives at the bailout press conference tried to present this as a one-off, they were not willing to rule out similar measures elsewhere - not that it would have mattered much, as the trust is gone anyway," Lars Seier Christensen, CEO of Denmark's Saxo Bank, posted on his blog. "If you can do this once, you can do it again."

($1 = 0.7654 euros)

(Reporting by Michele Kambas, Sonya Dowsett, Swaha Pattanaik, Tim Castle, Paul Taylor, Kirstin Ridley, Jamie McGeever and Alex Smith, writing by Mike Peacock; Editing by Will Waterman)

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Comments (9)
AdamSmith wrote:
The criminal wealthy class thinks this may set a dangerous precedent.

Yet when the criminal wealthy class was bailed out by massive government cash payments to save the wealthy from their giant gambling losses, we heard no complaint from them about any setting of precedents.

Today in America, the Fed continues the massive transfer of cash into the hands of the criminal wealthy class, with its stealthily named QE (quantitative easing).

The Fed’s QE is the biggest boon to the wealthy ever witnessed by modern markets.

The Fed has been buying up, from the wealthy, every worthless note the wealthy had been stuck with. The Fed has been buying everything, you name it. Worthless junk that nobody else would buy, the Fed has been buying it for top dollar, taking it off the hands of the wealthy.

The wealthy can barely contain themselves at their good fortune. Who would have thought they could get rid of those worthless pieces of paper? Yet, the Fed has now paid them roughly $1.5 trillion in cold, hard cash.

The wealthy, who had expected to lose everything, are now made richer than ever.

The Fed are very happy to accomodate them using the government’s money, and get invited to the country-club parties of the elite. And even President Obama, too, yearns for the invitations to the country-club parties of the elite, so he’s all in with the QE scheme too. No problem.

Once again in life, the wealthy criminal class wins, effortlessly. And the common man is ground into the floor under their heal.

QE is a far greater crime than TARP, and far more subtle for the average citizen to grasp.

Similar bailouts by European governments likewise have gone into the pockets of the criminal wealthy class there.

The Cyprus bank levy is a refreshing breath of fresh air in the opposite direction. Now we hear loud protests from the oligarchs about setting bad precedents. Very ironic.

Mar 17, 2013 2:15pm EDT  --  Report as abuse
leumasmc wrote:
The Cypriots could always raise some capital by switching over to the lira… Give it the good college TRY.

Mar 17, 2013 2:26pm EDT  --  Report as abuse
Venerability wrote:
Lot of interesting crosscurrents!

Some observations from a non-currency trader – ever – who understands that currency trading can often be the unruly tail that wags the dog of other markets:

***Cyprus is smaller than Dallas, slightly larger than San Jose. If some Oligarchs weren’t banking there, it would be pretty irrelevant in the scheme of things.

***News today that a new and very crazy-sounding Anti-Euro Party is forming in Germany, meaning both the Merkel-ites and the Steinbrueckers may scurry to support the Eurozone now.

***Bill Gross’s comments were irresponsible. Ditto Mr. O’Neill’s, who usually isn’t so careless and cavalier.

***This actually may help a newly powerful cadre of professionals going Long the Yen, against the legions of rank amateurs, including high schoolers, who are betting their babysitting and paper route money on Yen Shorts.

***Chinese finance officials visiting Latin America leak provocative comments about their sentiment that far from being over, US QE will continue and continue and continue, and how they are now looking at wide variety of currencies for their reserves, including Latin American currencies.

***And ultimate Technical Analysis of Propaganda: The Short Everything cadre at Zero Hedge have posted what seem like thousands of stories in a row about Cyprus Equals The Apocalypse. Long time since they have ranted and raved quite this loudly. Generally, they are Contrarian, meaning when they are quiet, be scared, and when they are loud, possibly tempest in a Mediterranean teapot.

In conclusion: I dunno. Do you?

Mar 17, 2013 2:56pm EDT  --  Report as abuse
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