Thursday 22 February 2018

Proposed Cyprus banking tax risks undermining other eurozone systems

A proposed levy on deposits in Cyprus would pose a threat to the financial stability of other vulnerable euro zone countries, according to a near-unanimous sample of analysts polled by Reuters.

Twenty out of 22 economists and bond strategists surveyed since Monday said a tax on deposits risks undermining the banking systems of other countries threatened by the euro zone debt crisis.

Cyprus is scrambling to find €5.8bn as demanded by the European Union under a €10bn rescue, but lawmakers rejected a levy on savings that would hit both poor and rich as "bank robbery".

According to the Cypriot parliament's speaker, a revised tax that focuses on larger deposits was not on the table, but an EU official warned Cypriot banks could face having its biggest banks wound down if it can't agree a levy on savings.

The levy originally proposed by euro zone finance ministers and the International Monetary Fund was 6.75pc on deposits below €100,000 and 9.9pc above that threshold.

In theory, euro zone deposits up to €100,000 are guaranteed, but analysts warned the proposal of a levy risked debasing that principle, literally overnight.

"The risk is that ... bank customers no longer trust the guarantee for private deposits in all member states of the European Union," said Gernot Griebling, head of bond research at German bank LBBW.

"In the case that rumours on solvency problems of another bank come up, this might lead to a bank run."

Jeroen Dijsselbloem, who chairs meetings of euro zone finance ministers, said any bailout of Cyprus, one of the currency union's smallest economies, will have to involve some kind of levy on depositors.

Dijsselbloem said he and his euro zone peers had urged Nicosia to avoid hitting accounts below €100,000 and to instead increase the levy on big accounts.

Billions of euros of the deposits are held by investors from Russia, whose president Vladimir Putin led fierce criticism of the levy, lambasting it as "unfair, unprofessional and dangerous".

Some analysts in the poll said the levy represented a dangerous precedent for on-the-hoof changes to established regulatory systems in the European Union, without consultation.

"Such a decision modifies the seniority of creditors, and in that sense is a huge game changer," said Rene Defossez, fixed-income strategist at Natixis in Paris.

A successful Spanish bond sale on Thursday at least brought an indication that investors so far are unconcerned the financial turmoil in Cyprus will spread to other parts of the euro zone.

Two respondents in the poll said the levy need not pose a risk to other euro zone countries.

"In that case, the ECB is ready and intended to do everything necessary. We do not expect any spillover," said Claus Rominger, analyst at DZ Bank in Frankfurt.

The respondents answered as part of the wider Reuters quarterly government bonds poll, also published on Thursday.



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