Tags: Turmoil | Cyprus | Europe | Debt

Turmoil in Cyprus Threatens to Revive Europe's Debt Crisis

Sunday, 17 Mar 2013 06:11 PM

 

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Europe braced for renewed turmoil as outrage in Cyprus over an unprecedented levy on bank deposits threatened to derail the nation’s bailout and spark a new round in the region’s debt crisis. The euro tumbled.

Cypriot President Nicos Anastasiades, who bowed to demands by euro-area finance ministers to raise 5.8 billion euros ($7.6 billion) by taking a piece of every bank account in Cyprus, addressed the nation to seek support for the tax. He delayed a vote on the measure in parliament until Monday amid talks to restructure the levy.

The tax is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future,” Joachim Fels, chief economist at Morgan Stanley in London, wrote in a client note.

Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm that settled over the 17-member bloc since the ECB’s pledge in September to backstop troubled nations’ debt. With no government in Italy, Spain in the throes of a political scandal and Greece struggling to meet the terms of its own bailout, more turmoil could hamper efforts to keep a lid on the crisis.

The euro fell below $1.30, sliding as much as 1.5 percent to $1.2926 at 9:25 p.m. in Frankfurt. Anticipating gains in haven markets, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said on Twitter that the concern in Cyprus “moves risk-on trade to backseat.” He added: “Sell euro as well.”

Bank Levy

Anastasiades exhorted political factions to support the deposit levy, which he pledged is a one-time measure that will avert a collapse of the financial system that in turn would have led to the country’s exit from the euro.

“A bank collapse would cause indescribable misery,” Anastasiades said in the televised address. He called the crisis the country’s worst moment since the 1974 Turkish invasion that has left the country divided.

In a bid to ease a run on banks, depositors who keep their account for two years will receive securities linked to future revenue its from the country’s gas reserves, the president said. He said he would also seek to soften the impact on savers.

The levy -- as of now 6.75 percent of all deposits up to 100,000 euros and 9.9 percent above that -- whittles the euro area’s bailout of Cyprus to 10 billion euros, down from an original figure of about 17 billion euros, near the size of the nation’s 18 billion-euro economy.

Cyprus is considering changing the structure of the taxes to charge big depositors more and small account-holders less, a a European official said. The European Commission, the International Monetary Fund and the European Central Bank would support that as long as the amount raised stayed he same, the official said.

Brussels Talks

Euro finance ministers reached agreement early Saturday after 10 hours of talks. Cypriots awoke to find bank transfers already frozen as the government prepared to impose the tax before banks reopen March 19. Monday is a bank holiday.

Anastasiades, who took office less than three weeks ago, said ECB would have stopped providing liquidity to one of the country’s banks on March 19, leading to its collapse, he said.

The president will meet with lawmakers Monday before the parliament’s session on the measure begins at 4 p.m. local time. His Disy party holds 20 seats in the 56-seat legislature. The third-biggest faction, Diko, which supported him in his February election, holds eight seats. Cyprus’s communist Akel party, with 19 seats, plans to vote no.

‘Chaos’ Road

Afxentis Afxentiou, the governor of the Central Bank of Cyprus from 1982 until 2002, told the state-run broadcaster CYBC that failure to enact the legislation “opens the road to chaos.”

“Cyprus will turn into Libya,” Afxentiou said. “Even with the pain, we need to follow a normal course, with hope we’ll see better days.”

Jeroen Dijsselbloem of the Netherlands, who leads the group of euro-area finance ministers, sought to highlight the rescue package’s “unique measures” that address the “exceptional nature” of Cyprus. Its banking system’s assets are about five times the size of the economy. Instead of targeting the country’s wealthiest depositors, which include Russian billionaires, the tax also stings ordinary savers.

“As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders,” Dijsselbloem told reporters at the euro group’s 4:30 a.m. press conference yesterday in Brussels.

IMF Contribution

The IMF may contribute to the package and junior bondholders may also be tapped in a so-called bail-in, the finance ministers said.

Barclays Plc said in a report Sunday that the deposit levy is the latest erosion of bondholder protection at European banks and an “ominous” sign of how bailouts are being handled.

The ECB’s pledge to buy bonds should prevail over market panic, though the tax on deposits brings the euro area into “uncharted territory again,” Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note.

“Given the fragile state of the banking systems, especially in Greece and Spain, anything that can impede the needed rebuilding of confidence in these banking systems can potentially cause financial and economic damage,” he said.

Cyprus also agreed to step up asset sales, make further budget cuts and increase its corporate tax. Russia, whose banks have loaned as much as $40 billion to Cypriot companies of Russian origin, will ease terms on its existing loans to Cyprus as the rescue unfolds, according to the plan. Cyprus’s finance minister is scheduled to fly to Moscow on March 20.

Cyprus Poll

In Cyprus, where a poll showed 71 percent of Cypriots said parliament should reject the levy, the immediate effects were on display. Many cash machines ran out of money, including cooperative bank ATMs, Erotokritos Chlorakiotis, the general manager of the Cooperative Central Bank, told CYBC.

A man in the coastal city of Limassol drove a bulldozer into a bank branch to protest the levy, CYBC reported Saturday. At a cooperative-bank branch in the capital Nicosia, a sign informed customers that it was shut on instructions from the Central Bank of Cyprus. Nicos Nicolaou, 57, said he hoped his deposits would not be affected.

“All my life I never had deposits in banks because I didn’t trust them,” he said. “I only worked with co-ops.”

Andreas Andreou, a 48-year-old public servant, said he felt betrayed by Anastasiades’s concession.

“We voted for him to save us and instead he’s disappointed us,” Andreou said.

© Copyright 2014 Bloomberg News. All rights reserved.

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