Cyprus faces 'corralito' à la Argentinean

Back in May 2012, fears that Greece may leave the EU triggered bank runs in the country, and many economist speculated with the possibility of the country establishing a “corralito”- the economic measures taken in Argentina at the end of 2001 that almost completely froze bank accounts and forbade withdrawals from U.S. dollar-denominated accounts. Bank runs extended then to Spain and Italy, although they finally come under control.

But revival came back this weekend: Cyprus bail-out approval cost almost €6 billion to taxpayers, which next Tuesday –Monday will be declared bank holiday-, will find something different in their bank accounts: a one-off 9.9% levy imposed on all deposits over the insurance threshold of €100,000. For accounts below the insurance ceiling, the onetime tax will be of 6.75%.

Cyprus PM Michael Sarris, admitted it was a tough decision, and even stated “I wish I was not the minister to do this,” although he added that “much more money could have been lost in a bankruptcy of the banking system or indeed of the country.”

Without a rescue, Cyprus would default and threaten to unravel investor confidence in the EU that has been fostered by ECB’s president Mario Draghi promise to do “whatever it takes” to shore up the currency bloc.

However, a precedent has been set, and this partial “corralito” may trigger exactly what is trying to prevent: an erosion in investors’ confidence in the EU, and bank runs, if not in Cyprus, in the rest of the peripheral troubled countries. Monday European opening may see bank runs, particularly in Spain and Italy, and a domino effect may force governments to take extraordinary measures. “Corralito” arrived to Europe, and may be here to stay.



More on Cyprus: levy needs to pass Congress now

In an unprecedented move, European finance ministers had agreed over the weekend, on a levy on Cypriots’ bank account, to save the country near € 6 billion and be eligible for bail-out. The move to take a percentage of deposits in between 6.75% and 9.9%, must now be ratified by parliament, where no party has a majority. If the country does not reach an agreement, it could face the first EU bankruptcy, not just on banks but for the country as a whole.

Whether fears of contagion will arise on Monday, is something yet to be seen. Some may consider that Cyprus is a sui generis case, as many account holders are foreign, particularly Russians. However, the fact that small account holders will also be affected exacerbates the feeling of unfairness and will put investors on guard. Authorities may ensure there’s nothing to fear in other countries, but retail depositors may choose not to believe these words.

Cyprus bank deposit tax to be voted on Monday

After early reports suggested that Cyprus's parliament would decide on Sunday the fate for thousands of small savers in the country, whose deposit are being threatened with a hugely injustice 6.75% tax on deposits as part of a deal struck between the Eurozone and the government, final talks were postponed until Monday, Reuters reports.

Unless the levy is ratified by parliament, where no party enjoys a majority, President Nicos Anastasiades has been very bold on his comments, saying that Cyprus's two largest banks would collapse.

Markets have been acting as if the levy on bank deposit is a done deal, which appears to be as Cyprus looks like being totally cornered, the Associated Press and Reuters note that with approval from this unpopular act of robbery is far from certain.

According to AP: "Cyprus' president said Sunday that he is trying to amend an unpopular euro zone bailout plan that would tax deposits in the country's banks to reduce its effect on small savers."

"I completely share the unpleasant sentiment that this difficult and onerous decision has caused," Anastasiades said, AP cites.

"That's why I continue to battle so that the decisions of the eurozone are amended in the next hours to limit the effect on small depositors."

At the same time, Mr. Anastasiades urged lawmakers to approve the tax as otherwise the country would go bust. The choice is between "the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis," President Anastasiades said in a written statement, Reuters reports.

According to Reuters: "The Cypriot government was on Sunday discussing with lenders the possibility of changing the levy to 3.0 percent for deposits below 100,000 euros, and to 12.5 percent for above that sum, a source close to the consultations told Reuters on condition of anonymity."

Cypriots wealth assault an act of legalized robbery

Imposing a 6.75% tax on bank deposits or around 10% on those savers with deposits above €100,000, still to be voted, is modern legalized robbery, comments Reuters columnist and founder Hugo Dixon.

"Confiscating saver's money will knock confidence in the bank. Trust in the government will also take a hit, since Nicosia has theoretically guaranteed all deposits up to €100,000. Small savers should be encouraged not penalized" Hugo says, adding that "the current Euro-zone mechanism is still an effective breach of promise."

The total sum needed to save Cyprus government and banks from bankruptcy was in the tune of €17 billion or 100% of its GDP.

Since the approved bailout has failed to find enough solidarity among Eurozone colleagues, only ensuring €10 billion, the remaining €7 billion left, as Hugo mentions, had to come from one of two options, "a haircut of the government's own bondholders or hit bank creditors..."

But since most Cyprus bondholders are their own banks, citizens are the ones to pay the consequences.

In Cyprus, there are customers that were supposedly enjoying insured deposits - amounts below €100,00 -, that is why facing the proposed 6.75% tax on this insured deposits becomes an act of legalized rip-off.

Hugo argues that it would be better to hike the tax but get it from the uninsured €100,000+ account savers, mostly Mafia/dubious origins-related reports suggest, which stands at over €38 billion.

However, as Mr. Dixon stresses, this is unlikely to happen since most of this capital is held by foreigners, thus the decision to inflate the tax on the richer may lead to extend distrust among foreign savers with the deepest pockets.

"Even if there is domestic political logic in cushioning Rusian Mafia at the expense of Cypriots widows, such a policy is bad for the Eurozone" Hugo says, adding that the event sets a precedent.

Cyprus likely to extend bank holidays on Tuesday and Wednesday

The Cypriot cabinet announced over the weekend that both Tuesday and probably Wednesday, a bank holiday will take effect. Fears are mounting over capital flights out of the banks after depositors were told the taboo decision of having to pay for the wrongdoings of the countries financial management.

According to Greek newspaper eKathimerini: "Nicosia postponed to Monday the tabling in Parliament of the bill including the measures for the Cypriot bailout – including a bank account haircut and tax hike on interest and corporate earnings – but the ECB insists on a rapid voting as there are already signs a domino effect will follow across European lenders and markets from Monday."

"Skai radio reported on Sunday that the Bank of Greece has sent between 4 and 5 billion euros to Cyprus in order to help Cypriot banks respond to cash requirements by their clients" eKathimerini adds.

Moody's: Cyprus bailout has negative implications for EU bank creditors

Moody’s rating agency is out with a brief note saying that Cyprus bail-out has negative implications for EU bank creditors. Looking at credit implication for sovereigns, Moody's says in unclear.

Moody’s expands: "The agreement reflects euro area policymakers’ desire to avoid sovereign defaults in addition to Greece... the support package reduces the immediate risk of a Cypriot debt restructuring."

Unless bailout ratified, Cyrpus faces risk of EUR exit - RBS

The Cyprus bailout story may help keep the EUR in a recent downtrend, says Greg Gibbs, FX strategist for RBS. He says that "EUR remains essentially in a downtrend since its high on 1 Feb, it is now testing significant support around 1.288, and the lower end of a recent declining channel..."

Greg adds: "Perhaps the most negative aspect of the Cyprus development is the uncertainty over how long it takes for its parliament to agree on depositor haircuts. The longer it takes the longer the bad taste stays in the mouth of all involved."

"Most of the criticism of the plan relates to the haircut faced by smaller depositors, and this is likely to generate considerable disagreement and debate in parliament. The deal agreed over the weekend between the Cypriot government and the Eurogroup must be ratified by Cypriot parliament. Until it is, banks are likely to be shut in Cyprus to avoid a bigger bank run" he adds.

Greg says that unless the Cyprus government approves the deal, "it may not get a bailout and thus need to exit the EUR..."

Since the Cypriot government controls 28 of 56 seats, and with the risk of members of a junior member of the coalition government threatening a NO vote, "the government is hoping for the support from a small pro-European party" Greg adds.