A decision by Eurozone officials, and imposed on the Cyprus government, to seize up to 9.9 percent of savings accounts in the island’s banks to help pay the cost of an international bailout is an “ominous sign” that could set a precedent in other countries with weak economies, the London-based Barclay’s Bank, England’s second-largest, said in a report.
“The imposition of a levy on depositors in Cyprus is a material development that furthers the erosion of bondholder protection at European banks,” the report said. “We believe the expropriation of SNS Reaal subordinated bonds, the imposition of losses on Anglo Irish senior bonds and the haircuts of depositors in Cyprus form an ominous trend.”
Euro-area finance ministers early Saturday morning agreed to an unprecedented tax on Cypriot bank deposits as part of a 10 billion euro ($13 billion) rescue plan for the country, the fifth since Europe’s debt crisis broke out in 2009.
Cyprus will impose a levy of 6.75 percent on deposits of less than 100,000 euros – the ceiling for European Union account insurance – and 9.9 percent above that. The measures will raise 5.8 billion euros, in addition to emergency loans.
The unprecedented decision to “bail-in” depositors underscores the lack of progress on a Europe-wide deposit protection system, Barclays said in the report. Cyprus was also a special case, it said, with 30 percent of deposits coming from non-euro countries. The size of Cyprus’s bank recapitalization needs, at 80 percent of economic output, dwarfs Ireland at 40 percent, Greece at 27 percent, Spain at 6.5 percent and Italy at nothing.
Erik Nielsen, chief economist at Milan-based UniCredit SpA (UCG), said Cyprus is a special case because its banking system was eight times larger than its economy. “I would assume that anyone in Spain, Portugal or elsewhere who knows about the taxation of Cypriot depositors also would know that the Cypriot banking system is a very different animal than anywhere else in the euro zone,” Nielsen said in a report to investors, Bloomberg news agency reported.
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