Turmoil in Cyprus Over a Bailout Rattles Europe
Published: March 17, 2013
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This is the first time depositors have taken a loss in a euro-zone rescue, said Adam Lerrick, a sovereign debt expert at the American Enterprise Institute, who has long argued that debt-heavy countries in Europe must make private investors, including bank depositors if need be, share the cost of bank bailouts. “It prevented the insolvency from being transferred from the banking system to the government,” he said.
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While such a notion may please the financial hard-liners, it carries significant financial risks.
Indeed, as many stunned Cypriotsrushed to A.T.M.’s to remove their savings, Europe had to confront the prospect that savers in Spain and particularly in Italy — where cash-poor banks have been hit hard by loan losses — would do the same.
Public officials in Spain and Italy did their best over the weekend to say that the situation in Cyprus was unique and that deposits in those countries — especially Spain, which experienced a period of deposit flight last year — remained safe.
Also Sunday, George Osborne, the British chancellor of the Exchequer, said that Britain would compensate British government and military personnel based in Cyprus whose finances would be affected by the levy. About 3,500 British troops are based on the island.
The tax on deposits is sure to make small banks with bad loan problems in other countries seem all the more risky — to depositors as well as to investors holding the banks’ bonds.
Economists warn that the psychological consequence of such a shock could lead not only to a bank run but a devastating economic collapse and plunge in gross domestic product similar to what happened in Greece.
“There has been a huge shock, and fall in G.D.P. will be very large just as it was in Greece,” said Alexandros Apostolides, an economist based in Nicosia. “Why would someone keep their deposits in a bank here if he cannot be assured that there will not be another bailout?”
Indeed, throughout the weekend many Cypriots were withdrawing as much as they could from their bank accounts.
“Why should I leave my money in Cyprus?” said an investment banker who for the past two days had been withdrawing the maximum 2,000 euros he was allowed from his foreign bank account in Nicosia. “I have already instructed my bank to send my entire savings to London when the banks open on Tuesday. A precedent has been set — what is to stop them from doing this again?”
The contentious talks over how to rescue Cyprus have continued for more than six months and only accelerated in the wake of an election last month that brought into power a new government that promised to impose the austerity measures required by Europe.
But when it came to losses for depositors, the government had assured the public as late as this past Friday that this was a red line that would not be crossed.
In the capital, Nicosia, the long lines at cash machines Saturday disappeared temporarily — mainly because A.T.M.’s had been drained of cash. But on Sunday, at a main branch of Laiki Bank — one of Cyprus’s two major financial institutions — employees were seen inside the darkened building hovering over computers and filling machines with bills.
As word got out, groups of people arrived in a steady stream to withdraw money, but not before expressing anxiety over what they said were decrees from Brussels and Berlin that would have implications far beyond Cyprus’s shores.
The general feeling was that European leaders were using Cyprus to test whether confiscating deposits would work, before possibly applying it more widely.
“They are trying to make an experiment with a small country,” said Stefan Kourbelis, a manager at the Centrum Hotel in Nicosia’s main square, echoing a widely held view. “If it works, the next one could be Spain, Italy and others. If things go badly, they can just say, who cares about Cyprus?” NEW YORK TIMES
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