Markets everywhere take a hit as Cyprus bailout bashes savers

Eurozone leaders have finally agreed a €10bn bailout for Cyprus banks, but the deal will hit savers where it hurts for the first time since Europe's banking crises began.

by Michael Northcott
Last Updated: 19 Aug 2013

Just as there was a sense that things were beginning to settle down in the eurozone (at least, no major blows for a couple months), Cyprus became the fifth nation to come cap in hand to the eurozone for some bailout money, secured over the weekend. Except, this time, the deal is harsher than ever. 

In the other bailouts, for Ireland, Greece, Portugal and Spain, savers in the countries’ retail banks have been protected – bondholders and the banks themselves have been required to take the hit on bad debts in return for bailout money. But with Cyprus, where the banking system had ballooned to eight times the size of the real economy. The plan is that everyone who holds deposits in a Cypriot bank will face a one-off levy of up to 10% of their balance. 

But this is yet to be approved by the Cyrpriot parliament (which votes on the issue on Tuesday), and there is already talk of the terms being watered down. It is possible that it will be reduced to a 3% levy, and that it will only apply to accounts which contain more than €100,000 as a way of protecting 'ordinary' savers.

Anyway, part of the reason for such a saver-bashing approach is that Germany (which has done most of the stumping up for European bailouts) is uncomfortable propping up banks that are popular with Russian oligarchs, who, to put it delicately, favour its sunny climate and flexible tax environment. But, as you might expect, the deal is not popular with Cypriots, and the government knows it. Neither has it found much favour with the Russian government - Putin has been reportedly angered by the proposal, which could cost Russian depositors as much as €2bn.

Steps are being taken to prevent Cypriots trying to withdraw all of their savings (a la Northern Rock), with electronic transfers blocked until the new cash comes in on tomorrow. Dutch finance minister Jeroen Jijsselbloem, who chaired the meeting where the terms were agreed, said: ‘We are not penalising Cyprus [with this deal].’ A great many people will disagree with you, Jez.

So what’s the upshot from all of this? Well, in early trading this morning, London’s FTSE100 fell just over 1.5%. In fact, markets everywhere took a tumble in reaction to the news: CAC in France down 1.9%; DAX in Germany down 1.5%, FTSE MIB in Italy down 2.5%; IBEX in Spain down 2.7%; Hong Kong 2%, Shanghai 1.68%...you get the picture.

The problem is that this sets a precedent. Next time a bank is bailed out, rinsing savers for their cash could be seen as a viable option because it ‘worked’ in Cyprus. But such a precedent could unleash a tidal wave of individual protectionism from savers across the world. This would lead to runs on banks, 2008-style.

And when banks want propping up, a run is the worst thing that could happen. Well done, Europe. 

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