Whether or not policy-makers in Cyprus amend the proposed bank levy on savers, the damage has been done according to a credit analyst from Fidelity:
Tristan Cooper, Fixed Income Sovereign Credit Analyst, comments: “The craziest thing about the Cyprus announcement is the huge potential cost of undermining the spirit of the bank deposit guarantee for what is a small saving in the overall scheme of European finances. Even if policy-makers now row back from taxing small depositors in Cyprus (likely), the damage has been done.
“This is unlikely to trigger immediate bank runs in other peripheral countries. This is because systemic banking vulnerabilities have already been addressed in Ireland/Spain/Greece (at least in the first phase) and Italy’s banking sector is not the primary source of macro-financial risk.
“However, the Cyprus decision does make it more likely that depositors will take fright whenever future Troika bailouts loom and banks are vulnerable. Haircutting depositors is now on the Eurozone policy menu as a means of capturing private wealth. A more sanguine view would be that Cyprus is a test case for this new policy. If it fails here – and by failure one can include a serious democratic backlash; sustained bank run; magnification of the financial crisis that the bailout is designed to solve – then it is unlikely to repeated elsewhere (a bit like the lesson from the sovereign haircut in Greece).
“In any case, the near future for Cyprus looks bleak and the parallels with Iceland are striking – the prospect of having to use capital controls to stem an exodus of deposits that will destroy the island’s previous economic model as an offshore financial centre. The silver lining is that the country’s gas reserves may offer redemption in the longer term.”
