“Rubicon Crossed” as Europe Demands Savers Bail Out Cyprus

(March 18, 2013) — The financial powers overseeing the Eurozone crisis have stepped over a line they vowed to avoid and demanded savers holding deposit accounts in Cyprus give up some of their money to bail out the beleaguered country.

In a deal proposed by the Eurogroup and International Monetary Fund (IMF) to raise €10 to €12 billion to recapitalise Cyprus’ banks, savers holding up to €100,000 in Cypriot deposit accounts are to be subject to a levy – or haircut – of 6.75%. Those holding over that amount would be hit by a 9.9% levy.

The announcement was made on Saturday morning and was aimed at targeting foreigners holding money on the island in an “offshore” facility. The decision to hit savers in the pocket flies in the face of assurances made by European governments that deposits of up to €100,000 would be protected under any circumstances.

This morning, M&G Investments’ bloggers, the Bond Vigilantes, said: “Whilst this crisis has already witnessed both equity and debt written down, the Rubicon of depositor burden sharing has now been crossed. Precedent now exists for this approach over the socialisation of losses across the Eurozone as a whole. Whilst the Troika will endeavour to play its significance down, unintended consequences may still materialise.”

Deutsche Bank’s Strategist Jim Reid said: “Although EU leaders have made it clear that the shock resolution in Cyprus is a one-off it has surely changed the landscape in Europe and now provides a template that will be at least on the table, even as a bargaining chip only, in the years ahead. The real damage here is going back on the government’s pledge to honour all deposits up to €100,000 – one that now exists EU wide.”

Reid continued that investors around the rest of Europe would begin to consider other ways of investing their money, instead of relying on bank deposit insurance schemes, which now could not be trusted. This would have wide-ranging impacts on a regional banking system that was already struggling.

Mark Holman, managing partner at bond specialist TwentyFour Asset Management, said Cyprus has long been known as a tax haven and money laundering centre – the country’s banking sector is over six times the size of its GDP – but small savers should not have been hit in attempts to solve the problem.

“Some additional transparency on what they are doing, and why they are electing to do it this way, is desperately needed in our view, otherwise the market will just interpret this as the preferred bailout method for other countries too,” he said, adding that today would be “risk off” while markets decided what to do. “It is clearly negative news despite what some say about the size of the problem, however until we have more details for the rationale of the package it is hard to judge just how negative.”

The Cypriot parliament is in deep discussion today and already potential, new options have appeared in the international press. The island nation is on a bank holiday today, this will prevent any savers removing their money. This bank holiday can be extended by politicians.

Deutsche Bank’s Reid concluded: “For now one would suspect that markets are calm enough that the contagion will be limited but such a move could easily amplify any future crisis in Europe as the spectre of deposit losses will now be on the table whatever politicians say in advance or whatever insurance scheme is on the table. So this is perhaps more of a slow burning issue than the start of the immediate resumption of stress. It is however worrying that little consistency has been used relative to previous bail-outs and that smaller seemingly insured savers have been brought into the solution.”