Cyprus bank levy sets risky eurozone first

By Mike Peacock, Reuters

LONDON — A hit imposed on Cypriot bank depositors by the eurozone 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 on a 10-billion-euro (US$13 billion) bailout for the stricken Mediterranean island and said that 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 eurozone 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 eurozone countries, even though the ministers insisted it was a one-off and Cyprus represents just 0.2 percent of eurozone 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. Eurozone 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 eurozone,” 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.