The Mediterranean island of Cyprus has been in the headlines over the weekend after its government announced that it had struck a deal with the European Central Bank and the International Monetary Fund to bail out its troubled banking sector. The terms of the bail out include a levy on savers deposits of up to 10%. News of the deal has sparked public anger and led to a wave of cash withdrawals from cash-points around the country as savers tried to beat the levy. The banks will remain closed until Wednesday as the country’s parliament will debate and vote on the measures tomorrow, Tuesday.
The highly controversial levy will take 6.75% of savers deposits on amounts below €100,000 and 10% for amounts above that figure. Private individuals, businesses, service personnel and ex-pats will all be hit by the levy, although it seems likely that the final terms of the levy will change before the debate tomorrow.
Joerg Asmussen, a member of the European Central Bank’s governing council, said there would be no objection to Cyprus altering the bailout terms, saying “It’s the Cyprus government’s adjustment programme. If Cyprus’ president wants to change something regarding the levy on bank deposits, that’s in his hands. He must just make sure that the financing is intact. The important thing is that the financial contribution of 5.8bn euros remains.” In other words the Cyprus government could change the percentages and cut-off points for the levy, but that it still must raise the €5.8bn contribution required from savers.
Although Cyprus accounts for just 0.2% of European output, there are fears that savers in other weak European economies such as Spain could become nervous and spark runs on banks, so the question is, could this happen in Spain? Fortunately Spain’s banking sector received their bailout back in December of 2012. Four banks were nationalised and €37 billion of European money was pumped into the sector from the European Stability Mechanism, guaranteeing depositors funds and ensuring that business could continue as normal.
Interest rates that Spain and Italy pay for their national borrowing shot up when markets opened this morning, before starting to fall back down. This has no immediate impact on Spain’s borrowing costs as Spain has already raised more than 30pc of its requirements for 2013, but if the the Cyprus crisis is not resolved quickly Spain might have to pay more for its borrowing in the future.
At present there is no indication that the Cyprus crisis will cause significant problems for Spain, but it will be a worrying time for anyone with a large amount of Euros on deposit in a European bank right now.
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