Cyprus plan to hit savers draws fury

A police officer stands near a protest banner Monday outside the parliament building before a meeting in Nicosia, Cyprus.

A police officer stands near a protest banner Monday outside the parliament building before a meeting in Nicosia, Cyprus.

Tuesday, March 19, 2013

NICOSIA, Cyprus - Leaders in Cyprus and Brussels and elsewhere in Europe scrambled Monday to contain the fallout from the eurozone’s decision over the weekend to force ordinary bank depositors to share the pain of an international bailout.

photo

AP

A protester shouts Monday outside of parliament in Cyprus capital Nicosia, as the island country’s lawmakers prepare for a parliamentary vote on a levy on bank deposits that the cash-strapped country’s creditors have demanded.

Much of the day was given over to cross-border finger-pointing and a public reluctance for anyone to take responsibility for a decision that some analysts worry could cause a run on banks in Cyprus - and possibly in Italy and other troubled eurozone countries.

The plan called for a special tax of up to 10 percent of savings accounts in Cyprus to help pay for a $20.4 billion financial bailout It was was met with fury Monday, causing the government to shut down banks until later this week while lawmakers wrangled over how to keep the island nation from bankruptcy.

Though the euro and stock prices of European banks fell, global financial markets largely remained calm, and there was little sense that bank-account holders elsewhere across the continent faced similar risk.

Political leaders in Cyprus were trying to devise a new plan that would not be so burdensome for people with less than $129,432 in the bank.

The authorities delayed a parliamentary vote on the seizure of $7.5 billion and ordered banks to remain shut until Thursday while they try to modify the deal, which must be approved by other eurozone governments. Once a deal is in place, they will be ready to lend Cyprus $13 billion in rescue loans.

A rejection of the package could see the country go bankrupt and possibly drop out of the euro currency - an outcome that would be even more damaging to financial markets.

Even while playing down the chance of fresh market turmoil, experts warned that the surprise move broke an important taboo against making depositors pay for Europe’s bailouts. As a result, it may have longer-term consequences for confidence in Europe’s banking system - and its ability to end its financial crisis.

“It’s a precedent for all European countries. Their money in every bank is not safe,” said lawyer Simos Angelides at an angry protest outside the parliament building in Cyprus’ capital, Nicosia, where people chanted, “Thieves, thieves!”

Members of the Eurogroup, the eurozone finance ministers who finished a bailout plan for Cyprus in the wee hours of Saturday, held a conference call Monday to talk things through once more. Germany was widely thought to have taken a hard line against Cypriot depositors because of the large volumes of money stashed there by rich Russians. But the German finance minister, Wolfgang Schauble, was quoted Monday by Reuters as denying that Germany had pressed for smaller depositors to be taxed as well.

The eurozone finance ministers concluded during the call that small depositors should not be hit as hard as others. They said Cypriot authorities will stagger the deposit seizures more, but remained firm in demanding that the overall sum raised by the seizures remain the same.

In the short term, there was little sign Monday of a new explosion from the European financial crisis.

Stock markets dropped early with large banks in the Netherlands, Spain and France leading stock-market declines across Europe. However, by the end of trading in Europe, most indexes had regained much of the lost ground. And there seemed to be scant carryover effect on U.S. markets- though the euro was down almost 1 percent against the dollar at 1.29.

In the United States, the Dow Jones industrial average fell 62.05 points, or 0.4 percent, to 14,452.06 Monday. Government bond prices for Italy and Spain were roughly unchanged, suggesting that investors do not expect the market trouble to spread beyond Cyprus for now.

In part, that may be due to the fact that Cyprus’ case is by many measures an exception.

The decision to hit deposits up to $129,432 - the deposit insurance limit in Cyprus - with a 6.75 percent tax and those above that with a 9.9 percent tax was dictated partly by the unusual qualities of the country’s financial system.

Cyprus, with only 0.2 percent of the eurozone economy, has a bloated banking system seven times the size of the island’s economy.

Losses on Greek government bonds had crippled Cypriot banks, which needed government money to bail them out. A large proportion of Cypriot bank deposits - 37 percent - come from people outside Cyprus and the European Union, much of it from Russia.

European leaders wanted to limit the size of the rescue loans - which are backed by European taxpayers - to $12.9 billion. Leaders were also reluctant to bail out Russian depositors whose funds may be the result of tax evasion, crime or money laundering.

Dario Perkins, an analyst at Lombard Street Research, noted that “the German government couldn’t be seen bailing out Russian mafiosi just before an election.”

However, Cypriot President Nicos Anastasiades urged policymakers in Brussels to soften the terms of the deal, saying EU leaders used “blackmail” to get him to agree to penalize depositors in order to receive the bailout package.

Even though Russia is not a member of the euro, its support of the plan is considered essential because of the large amount of Russian funds held by Cypriot banks.

President Vladimir Putin on Monday described the bailout plan as “unfair, unprofessional and dangerous,” the Interfax news agency quoted a Kremlin spokesman, Dmitry Peskov, as saying.

Bloomberg News reported that one prominent businessman, Alexander Lebedev,wrote on his Twitter account that the seizure of funds was “a Cypriot neo-Marxist blow to the global economy” while Prime Minister Dmitry Medvedev said in comments broadcast by NTV television that the measure “looks like confiscation of strangers’ money.”

Foreign holdings made up $34.7 billion of a total $83.9 billion in deposits as of December, according to the Cyprus central bank. Russians held $19.9 billion of the total, according to the Regional Banking Association of Russia. Cypriot banks have been a Russian haven because it is a way to convert rubles to euros, taxes are low and, according to critics, few hard questions are asked about the source of the funds.

Officials say by tapping depositors, they are reducing the total amount of debt taken on by the government, keeping it to a high but manageable 100 percent of GDP by 2020. That will mean less-painful austerity cutbacks than those that were imposed on Greece as a condition of its loans. Partly as a result, Greece is in the sixth year of recession.

Cyprus’ banking association issued a statement calling on people to remain “calm,” saying it was ready to implement whatever measures were needed to protect the stability of the banking sector. The association said it would instruct banks to load ATMs with cash while banks remain closed.

European authorities have ways to defuse bank runs, should they occur. If depositors start withdrawing money, the Europlean Central Bank and national central banks can replace the funds with cheap credit through their emergency lending programs - so long as the banks have securities to put up as collateral.

For the first time since the onset of Europe’s sovereign debt crisis and the bailouts of Greece, Portugal and Ireland, ordinary bank depositors - including those with insured accounts - were being called on to bear part of the cost, to the tune of $7.5 billion. The plan also wipes out so-called junior bondholders in Cypriot banks, who would give up $1.8 billion in holdings.

Even last year when the eurozone finance ministers agreed to a bailout for Spain’s banks, there was no talk of making depositors share the pain - which is one reason a flight of money from Spain slowed significantly after the Spanish government agreed to the terms.

The previous European bailouts have been financed heavily by eurozone taxpayers, and the new direction raised fears that depositors might eventually start to flee Spanish banks again, or start pulling money from Italian banks. Italy and Spain, with vastly larger economies than Cyprus’, have struggled of late, and both continue to work through their banking problems.

But down the road, the Cyprus precedent, even if quickly reversed, could come back to haunt eurozone policymakers by making depositors less sure about the safety of their money in case of trouble. It also could complicate creation of an EUwide system of bank deposit insurance, part of long-term efforts to create a more robust financial system and prevent future crises.

Technically, the national deposit insurance scheme remains intact. The money is being taken as a one-time tax - little comfort to those who thought their money was safe.

The deal adds uncertainty for depositors and investors because it underlines to ordinary people that there is no EU-wide deposit guarantee. Insuring deposits is a national responsibility - and can only be done when the government has the money.

“Basically, Cyprus has not honored, at least as of Saturday morning, an obligation that is enshrined in EU legislation,” said Nicholas Veron, a visiting fellow at the Peterson Institute for International Economics in Washington. “It clearly has consequences because I think there is a very clear message to depositors in Europe.

Information for this report was contributed by Liz Alderman of The New York Times, and David McHugh, Menelaos Hadjicostis and Sarah Di Lorenzo of The Associated Press.

Front Section, Pages 1 on 03/19/2013