Cyprus bank raid pushes Europe into uncharted waters
Euro-area finance ministers agreed to a tax on Cypriot bank deposits as officials unveiled a €10billion ($A12.57 billion) rescue plan for the country, the fifth since Europe's debt crisis hit in 2009.
In a move that has caused shock and dismay among its citizens, Cyprus will impose a levy of 6.75 per cent on deposits of less than €100,000 - the ceiling for European Union account insurance - and 9.9per cent above that.
Asked whether a future EU-mandated bank levy can be categorically ruled out, Olli Rehn, who is the European Union Economic and Monetary Commissioner, said that "it can and there is no concrete case where it should be considered".
Mr Rehn said he did not expect an adverse market reaction to the precedent-setting tax on deposits both above and below the insured limit of €100,000.
"Market forces understand that the sheer size of the problem of the Cypriot banking sector and its troubles were so huge that we needed to take very substantial measures," he said.
"This kind of stability fee is clearly a much better choice from the point of view of financial stability and Cypriot citizens than a full-scale bail-in, which would have led to very chaotic consequences in the Cypriot economy."
However, analysts said the move would increase pressure on the euro. Holger Schmieding, chief economist at Berenberg Bank, said the risk it could backfire was "not zero" and Europe was in "unchartered territory again".
The measures will raise €5.8 billion, Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area ministers, told reporters after 10 hours of emergency talks in Brussels.
The euro region's bailout kitty and, possibly, the International Monetary Fund will look to make up the shortfall. A partial "bail-in" of junior bondholders is also possible.
"Further measures concern the increase of the withholding tax on capital income, a restructuring and recapitalisation of banks, an increase of the statutory corporate income tax rate and a bail-in of junior bondholders," European finance ministers said in a communique released after the talks.
The European Central Bank will use its existing facilities to make funds available to Cypriot banks as needed to counter potential bank runs. Depositors will receive bank equity as compensation.
Cypriot Finance Minister Michael Sarris said the plan was the "least onerous" of the options Cyprus faced to stay afloat.
"It's not a pleasant outcome, especially of course for the people involved," said Mr Sarris.
While the tax on deposits will hurt wealthy Russians with money in Cypriot banks, it will also sting ordinary citizens. Some ATMs in the country have run out of cash, Erotokritos Chlorakiotis, general manager of the Cooperative Central Bank, told state-run CYBC.
Funds to pay the levy were frozen in accounts immediately, ECB executive board member Joerg Asmussen said. The levy will be assessed before Cypriot banks reopen on March 19 after a March 18 national holiday. Mr Sarris said electronic transfers would also be limited until then.
"As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders," Mr Dijsselbloem said, noting the country's financial industry was five times the size of its economy. The plan includes "unique measures" that address the "exceptional nature" of Cyprus and show "inflexible commitment to financial stability and the integrity of the euro area". The IMF will consider contributing money to the rescue, said IMF managing director Christine Lagarde, who travelled to Brussels for the talks. "We believe that the proposal as outlined by Jeroen is actually sustainable," she said.
EUROPE MONEY WOES
September 15, 2008
Global credit markets freeze following the collapse of Lehman Brothers
May 2, 2010
Europe and the IMF announce €110 billion Greek bailout
May 7-9, 2010
European financial ministers create €500 European financial stability facility
August 4, 2011
The European Central Bank starts buying Italian and Spanish bonds as contagion fears spread
December 24, 2011
Cyprus borrows €2.5 billion from Russia to fund its 2012 financial needs
February 12, 2012
Greek parliament approves austerity measures
June 25, 2012
Cyprus formally requests a bailout from the EU and IMF
October 10, 2012
IMF admits austerity measures have hurt the European economy more than it originally thought
March 16, 2013
Cypriots learn their bank accounts are to be raided as part of a €10 billion bailout of the country’s banking system
Frequently Asked Questions about this Article…
The article describes an unprecedented decision in March 2013 where euro-area ministers agreed a €10 billion rescue plan for Cyprus that included a one-off levy on bank deposits. Authorities imposed a 6.75% charge on deposits below €100,000 (the EU deposit insurance ceiling) and 9.9% on amounts above that to help recapitalise Cyprus’s oversized banking sector and raise roughly €5.8 billion as part of the rescue.
Although €100,000 is the EU’s account insurance ceiling, the Cyprus levy was applied both below and above that threshold in this case. The article notes the levy hit deposits under the insured limit as well as larger accounts, so the usual deposit-insurance expectation did not prevent the one-off charge in Cyprus.
Euro-area finance ministers authorised the plan after emergency talks. Euro officials including Economic and Monetary Commissioner Olli Rehn and Dutch Finance Minister Jeroen Dijsselbloem defended the measure as necessary for stability; a euro-area tsar also promised the raid would not be repeated, and Rehn said there was no concrete case for an EU-mandated bank levy going forward, according to the article.
The article says a partial 'bail-in' of junior bondholders was possible as part of the rescue and that analysts warned Europe had entered 'uncharted territory.' While officials downplayed the prospect of a repeat EU-wide levy, the piece highlights that extraordinary measures such as bail-ins were being considered for troubled banks.
Some analysts warned the move could increase pressure on the euro and that the risk of it backfiring was 'not zero.' European officials, however, expressed the view that the measure addressed the exceptional size of Cyprus’s banking problems and should support financial stability.
Authorities froze funds to collect the levy and limited electronic transfers until banks reopened (scheduled for March 19 after a March 18 holiday). The European Central Bank said it would use existing facilities to provide liquidity to Cypriot banks to counter potential bank runs, and depositors were to receive bank equity as compensation.
The package mentioned in the article included restructuring and recapitalisation of banks, a possible increase in the withholding tax on capital income, an increase in the statutory corporate income tax rate, use of euro-area bailout funds and possibly IMF contributions, and the potential bail-in of junior bondholders.
The article’s reporting illustrates that in extreme banking crises authorities may use extraordinary measures—including levies and bail-ins—that can affect both large and smaller depositors, at least in that instance. It also shows central banks and international institutions (like the ECB and IMF) can step in with liquidity or funding, but the event underscored heightened market and currency risks while Europe dealt with the banking fallout.
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