In what could be described as a calculated move albeit applied with great stealth, depositors in Cyprus woke up recently to find out, that a portion of their hard earned savings miraculously disappeared (via a tax / levy) at the hands of the government magicians with no promises that the appropriation of funds would reappear.
Just when you thought ‘bail-out’ was no longer in fashion, then presto another troubled euro-zone economy comes begging for a rescue. Only this time, agreement of the bail-out for Cyprus was on the proviso that the raid on depositor accounts would be orchestrated immediately.
Not surprising the reaction locally in Cyprus has not gone down too well, with many struggling to withdraw their hard earned savings; smart move by the authorities to grab depositors funds over a long holiday weekend whilst simultaneously placing impediments across electronic transfer channels.
Whatever your view on the matter and it's merits, the execution of mandatorily applying the deposit levy is audacious at best. There is a fear that the spill-over from the long-queues at ATMs will ultimately result in destroying overall confidence in the local banking industry, as any funding remaining post the levy will not be entrusted to be safeguarded, hence most likely see its way out of the country.
Cyprus has traditionally been viewed as investor friendly, but the recent draconian action is one way to break up that friendship. So what are the details of this USD13BN rescue plan? Well it’s a combination of loans from Eurozone countries, coupled with the tax on local Cyrpriot deposits (haircuts ranging from 6.75% to almost 10%) and perhaps some assistance from the IMF.
What are the ramifications, contagion elsewhere, perhaps a new precedent has been set for other future bailouts? Not entirely clear where we’re heading, although authorities reassure us that this course of action is the best option for Cyprus.
However it seriously underestimates the wider destabilizing regional impact and perhaps could precipitate another funding and liquidity crisis. Dangerous game to play considering the fragile investor and depositor confidence of the other bailed out Eurozone nations.
Expect to see the liquidity pumps of the ECB to be primed and ready for action, only question mark is how long will the taps need to remain open?
Ziauddin Ishaq is the Global Solutions Lead for Liquidity Risk at Oracle. He can be reached at ziauddin.ishaq AT oracle.com