March 19 (Bloomberg) -- Reserve Bank of Australia Deputy Governor Philip Lowe said the European Union’s decision to force Cypriot savers into a bailout was a “step back” for the region and could increase instability in the financial system.
“The fact that this approach of haircutting depositors has been sanctioned could lead the public to think it could happen again,” Lowe said in response to audience questions following a speech in Sydney. “It could make the system more susceptible to bank runs and that’s something that the authorities in Europe will have to watch very, very carefully.”
The Cypriot government announced an unprecedented tax on deposits three days ago, seeking European aid after its banks lost 4.5 billion euros ($5.8 billion) on Greek sovereign debt and failed to meet European capital requirements. With Cypriot lawmakers voting today on how to spread the burden among account holders and the proposed tax roiling markets, the U.S. called for a “responsible and fair” resolution to the financial crisis in Cyprus, the fifth euro country to seek a bailout since 2010.
The proposed levy sparked outrage in the island nation and concern among investors about setting a precedent by breaking the taboo against raiding bank accounts.
“What we’ve seen in the last couple of days is a step back,” Lowe said. “The idea that you would go and effectively haircut small depositors to help a government fiscal situation was not something that had really been countenanced by the international community before.”
To contact the reporter on this story: Angus Whitley in Sydney at email@example.com