EU raid on savings to fund bail-out for Cyprus ‘threatens recovery’
By Robert Winnett, and Tom Whitehead
10:00PM GMT 17 Mar 2013
The island’s government has announced that, following pressure from finance ministers in the eurozone, it is introducing a levy on all bank deposits in the country to pay for a rescue package for its troubled economy.
Suggested levies of 6.75 per cent of all deposits up to €100,000 (£86,500) and 9.9 per cent for larger deposits sparked chaos as people unsuccessfully attempted to withdraw their money from banks. Cyprus had to stop people accessing their savings — an emergency measure that is unlikely to be lifted in the coming days.
But it was the precedent that may have been set by the terms of the bail-out that was causing concern among international investors who were previously hopeful that European economies were finally recovering.
There were fears that savers in other nations in economic difficulty may start withdrawing bank deposits, a move that could have disastrous consequences. Financial figures from across the world warned of the dangers.
The levy is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future,” wrote Joachim Fels, the chief economist at Morgan Stanley in London, in a note to clients.
Lars Seier Christensen, the chief executive of Denmark’s Saxo Bank, wrote: “If you can do this once, you can do it again.”
Mohamed El-Erian, the chief executive of Pimco, the world’s largest bond investor, said: “In Europe, it [the Cyprus bail-out] could well undermine the recent tranquil behaviour of depositors and creditors in other vulnerable European economies – in particular Greece, Italy, Portugal and Spain.
“Despite assurances from European officials that Cyprus is ‘exceptional’ and the measures are ‘unique’, this weekend’s actions have increased the risk premium.”
Barclays said in a report that the deposit levy was an “ominous” sign of how bail-outs were being handled.
More than 50,000 Britons are thought to have bank accounts in Cyprus, including about 3,000 members of the Armed Forces serving in the country. George Osborne, the Chancellor, has offered to compensate them if they are hit. Cypriot banks operating in this country are not affected.
The Cypriot parliament was due to meet on Sunday to approve the scheme but discussion has been suspended until Monday – after global financial markets have resumed trading.
It was unclear on Sunday night whether the country’s coalition government could secure parliamentary support for the unprecedented move. If they fail, Cyprus and its banks would be forced into bankruptcy.
Cyprus is a member of the euro and the decision of the single currency’s finance ministers to force a raid on bank accounts marks a major change in strategy. There was previously a tacit understanding that people’s savings were secure in any eurozone bank.
Jeroen Dijsselbloem, the Dutch finance minister who is president of the Euro Group, said: “As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders.”
Nicos Anastasiades, the president of Cyprus who took office less than three weeks ago, said the choice was between “the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis”. He said the European Central Bank would have stopped financing one of the country’s banks — leading to its collapse — without the bail-out package.
In Cyprus, people were touring cash machines trying to withdraw money. They accused the government of deliberately timing the surprise announcement at the start of a festival weekend, especially after the president had previously assured the nation that he would not accept a bail-out deal that required such a move.
Sharon Bowles, the chairman of the European Parliament’s Economic and Monetary Affairs Committee and an MEP for South East England, said it looked like the banks in Cyprus would remain closed and she feared a run on cash.
Howard Skelton, a Briton living in Limassol, said: “Dick Turpin has been resurrected from the grave. The feeling is people are being robbed by the government.”
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