‘Cyprus levy on deposits may have contagious effect’
Eurozone finance ministers demanded Cyprus pay up to 10 per cent
of their bank deposits in exchange for a €10bn bailout, which has
already resulted in panic across the Mediterranean Island as people
rushed to cash machines to withdraw their savings.
According to the latest proposal, smaller depositors with up to €100,000 would be taxed at 3 per cent, savers with €100,000 to €500,000 would lose 10 per cent, while those with more than €500,000 will see 15 per cent written down.
The Cypriot parliament will vote on the deposit levy on Tuesday.
Aton's Peter Westin warns that if the unpopular measure goes
forward it may have a contagious effect and repeat itself in other
EU states in economic difficulty.
“Given the fact, that the bank assets are five times the size of GDP, really, Cyprus needs to come to some kind of a solution. But I think what people are looking at now is the kind of a strange demand that the Eurozone is imposing, which is a levy on deposits. Which means it’s not only the rich Russians, who’ll lose their money in Cyprus, but also the local population. So, this is quite a precedent. And the reason is… if they won’t deal with that it’ll have a contagion effect.”
According to Westin, politicians are “unpredictable" so one shouldn’t take on faith European MP’s promises the Cyprus deposit raid won’t happen in other countries.
“Even though we have parliamentarians in Europe saying that this is a one off. The problem is will the depositors in Italy, Spain and Greece believe this and will this cause a renewed massive crisis in Europe? Interestingly, people are looking at the size of the countries – when Greece hit the headlines, people were saying Greece is just 2 per cent of the Eurozone’s GDP and it’ll be a limited isolated effect. But it spread very quickly. Cyprus is ten-times smaller, but again I think we know that in this case size isn’t important.”
“In this case the most challenging effect will be diminishing expectations of other countries. So if there’s a belief among depositors in other countries than we can have a run on the banks in these other nations. So far as we’ve heard from Spain there hasn’t been a major panic as of yet, but I think this remains to be seen. And this is maybe the biggest fear that it may spread to other nations.”
The strategist stressed that the recent events have “tarnished Cyprus as a tax heaven”, adding that it doesn’t mean the Russian citizens, who keep over $18.3 billion in Cypriot banks, will return their savings home.
“For now, Russians tend to look abroad for place to put their money. And those that do that – Cyprus won’t be their best choice now. But those, who want to put the money offshore will put their money offshore. Efforts to bring the money back to Russia require a lot of initiatives from the government. And we’re still at the starting point of that.”
Westin concluded by saying that Singapore, may replace Cyprus as a magnet for cash from Russia.