Here are the reasons European depositors would be wise to leave their money in the bank, despite the crisis in Cyprus:
1. Cyprus constitutes a tiny part of the European economy – just .25%. Greece, on the other hand, was 10 times bigger when it got into trouble, or 2.5% of the eurozone economy.
If not for the action taken by its government to levy depositors, with its potential to cause a wider panic, no one would have cared about the decision.
If the panic is contained, the economic woes of Cyprus are unlikely to have a wider impact on Europe’s economy.
2. The decision to levy bank depositors has understandable logic because of the unusual nature of the Cypriot economy, Oliver says. For example:
a. Cyprus asked for 17 billion euros. Although this is small compared to what has been given to Greece, Ireland, Portugal and Spain – more than 300 billion euros – the amount would have doubled the country’s public debt relative to its economy. Oliver says: “The European Central Bank said to the Cyprus president … we would be handing you a lot relative to what has been given to other countries if we give you 17 billion euros.” The ECB agreed to a 10 billion euro package, of which 6 billion euros would come from Cyprus’ bank deposit levy – a decision that makes a lot more sense relative to the size of the economy.
b. More than 30% of deposits in Cyprus are from countries outside the eurozone. This is because it is widely known as a tax haven – with a corporate tax rate of 10% – and a centre for money laundering. If the ECB had bailed out the banks, it would have been bailing out the foreign depositors too, an unpalatable result.
c. Because of its tax haven status, its bank assets constitute 800% of Cyprus’ gross domestic product, compared with the European average of 350%.“The feeling is that Cyprus’ problem is largely a bank problem owing in part to it being tax haven,” Oliver says.
3. The European Central Bank (ECB) has guaranteed liquidity for eurozone banks, which means that depositors won’t turn up to their bank and find it has no funds. However, there has not been an unequivocal guarantee that the deposit levy will not be applied in other countries. “So far, there hasn’t been a run on the banks, so the president of the ECB has not had to make any promises,” Oliver says. “European Union Economic and Monetary Affairs Commissioner Olli Rehn ruled out deposit taxes for future rescues, but in the short term this won’t necessarily stop depositors in other eurozone countries from worrying about it.”
4. The recapitalisation requirement of banks in other counties is small relative to that in Cyprus. In Spain, Oliver says, the amount needed to recapitalise banks was roughly 6.5% of gross domestic product, while Italian banks need nothing. In Greece, it was about 27% of GDP and Ireland around 40%. But in Cyprus, the amount needed is 80% of GDP.
5. Ireland and Portugal are already well down the path of economic reform, Spain’s banks have the money they need without deposit taxes, and Italy doesn’t need money for its banks.
Kath Walters is the editor of LeadingCompany and an award-winning journalist of 15 years’ experience. Kath was previously a senior writer and editor at BRW magazine covering management, strategy, finance, entrepreneurship and venture capital across all industry sectors. In 2006, Kath won the Citibank Award for Excellence in Journalism (General Business). Follow her on Twitter @KathWalters. This article first appeared on LeadingCompany.
