Cyprus surprise - Cypriot depositors to take a 'haircut'

Mr_Mumble

BRUSSELS — Cyprus reached a long-awaited bailout agreement early Saturday that puts some of the burden for shoring up the island’s beleaguered economy on its bank depositors.

The most contentious issue in months of negotiations was whether to force Cypriot depositors to take losses in order to make the country’s debt more manageable. The Cypriot authorities had sought to head off any such initiatives on the grounds that they would do lasting damage to their financial services sector.

In the early hours of Saturday morning, after 10 hours of talks, finance ministers from euro area countries, the International Monetary Fund and the European Central Bank agreed on terms that include a one-time tax of 9.9 percent on Cypriot bank deposits of more than 100,000 euros, according to a person with direct knowledge of the talks who asked not to be identified while ministers still were hammering out details in private.

http://www.nytimes.com/2013/03/16/business/global/showdown-looms-over-cyprus-bailout-deal.html?hp&_r=0


Edit for new details:

antrobus wrote: »

The BBC report states:-

People with less than 100,000 euros in Cypriot bank accounts will have to pay a one-time tax of 6.75%, while those with more will have to pay 9.9%.

http://www.bbc.co.uk/news/business-21797888

Will this really be a 'one time' tax for those with money in Cyprus? Will depositors in Greece, Italy or Spain get skittish and withdraw money?

If there is a risk of any loss on deposits customers are going to take out their money (e.g. Northern Rock when anyone with a deposit between £2K and £35 was only insured on 90% of this amount). The risk of an EU bank run here is real, no wonder this announcement was timed for the traditional Friday night news dump!

Edit 2: a little clarification of what this may mean for UK depositors with Cypriot banks from the FT:

What does the bail out mean for UK depositors?
By Patrick Jenkins, Banking Editor

Customers of the UK units of Cyprus’s banks probably have nothing to worry about, according to people close to the situation.

The British subsidiary of Bank of Cyprus said depositors’ money would be unaffected by the haircut being applied to accounts operated by its parent company. Subsidiary structures, which hold ringfenced capital and funding and are more tightly supervised by local regulators, offer greater legal protection in this kind of incidence.

It is less clear whether UK customers of the other main Cypriot bank, Laiki – formerly known as Marfin – will be similarly protected. Laiki operates as a branch in the UK, rather than a segregated subsidiary. However, people close to the situation suggested it, too, was confident that customers in the UK would not be hit by the haircut decision.

Wookster

It should be noted that Cypriot banks hold a huge amount of Greek depositor's funds as well.

We're about to see another EU failout.

Generali

Mr_Mumble wrote: »

I presume this doesn't apply to accounts domiciled outside Cyprus itself as it doesn't seem feasible for the Cypriot government to tax them?
http://www.nytimes.com/2013/03/16/business/global/showdown-looms-over-cyprus-bailout-deal.html?hp&_r=0

This probably hurts Russian Oligarchs more than Cypriots but it could set a worrying set of events in motion.

Will this really be a 'one time' tax for those with money in Cyprus? Will depositors in Greece, Italy or Spain get skittish and withdraw money?

If there is a risk of any loss on deposits customers are going to take out their money (e.g. Northern Rock when anyone with a deposit between £2K and £35 was only insured on 90% of this amount). The risk of an EU bank run here is real, no wonder this announcement was timed for the traditional Friday night news dump!

For technical reasons, it's better to announce this at the weekend as it gives the banks 60 hours to identify and debit the customers impacted.

It's a welcome development that rich people aren't being bailed out by poor people IMHO. If you take a risk by lending a company money (e.g. by putting cash on deposit in a bank) then you have a possibility of a loss. The risk free option is to put the money in a safe deposit box but then you don't get interest.

Mands

Mr_Mumble wrote: »

Will this really be a 'one time' tax for those with money in Cyprus? Will depositors in Greece, Italy or Spain get skittish and withdraw money?

Initial reporting was flawed: there are two levels of tax. Over 100k there's a 9.9% levy, under 100k there's a 6.75% levy. So Cypriots and Russians and anyone else really.

Generali wrote: »

For technical reasons, it's better to announce this at the weekend as it gives the banks 60 hours to identify and debit the customers impacted.

Longer than 60 hours as this is a holiday weekend.

Mands

antrobus

See also https://forums.moneysavingexpert.com/discussion/4499833

The BBC report states:-

People with less than 100,000 euros in Cypriot bank accounts will have to pay a one-time tax of 6.75%, while those with more will have to pay 9.9%.

http://www.bbc.co.uk/news/business-21797888

So it appears that it's not only 'rich' depositors that are taking a haircut. All depositors are taking a haircut.

Wookster

UK depositors seem to be the second hardest hit after Russians. It seems that they will lose between £200 & £250million!

Mr_Mumble

Generali wrote: »

For technical reasons, it's better to announce this at the weekend as it gives the banks 60 hours to identify and debit the customers impacted.

A bank holiday weekend in Cyprus too to give them more time. Rather convenient.

It's a welcome development that rich people aren't being bailed out by poor people IMHO. If you take a risk by lending a company money (e.g. by putting cash on deposit in a bank) then you have a possibility of a loss. The risk free option is to put the money in a safe deposit box but then you don't get interest.

I agree with the sentiment and called for Northern Rock and, especially the following year, Icesave customers to take the loss on their deposits that were not insured.

By all means depositors should be treated pari passu with senior debt holders but if governments promise to pay out deposit insurance they shouldn't bypass this obligation by setting up a new, blatantly arbitrary, tax. The EU promised deposit insurance now seems worthless.

michaels

And some would say that it was the whole 'deposit insurance' scam which led directly to casino banking and 'too big to fail' - if it had been caveat lender (depositor) people would have been much more careful where they put their money and thus banks would have been incentivised to be prudent.

AS normal it turns out not to be a market failure but a failure as a result of govt intervention in the market.

Graham_Devon

Can I get this straight?

Say if you had 10k in a bank operating within the UK and they did this. Any of the high street names say.

Would you be charged £675 as a tax levy?

HAMISH_MCTAVISH

Graham_Devon wrote: »

Can I get this straight?

Say if you had 10k in a bank operating within the UK and they did this. Any of the high street names say.

Would you be charged £675 as a tax levy?

Yes.

Effectively you would check your account on Monday morning and your new balance would be £9325, down from £10,000 on Friday.

Or down to £90,100 on Monday from £100,000 on Friday if you have 100K or more in savings.

michaels

If I had savings in one of those Indian banks who were recently offering high rates or even in ING I wold be seriously thinking about this. I believe Santander UK is a separate legal entity and safe from any Spanish Govt asset grab?