Cyprus Banks Like Iceland’s Dwarf Economy as Clients PayNicholas Comfort and Annette Weisbach
The European Union’s decision to force Cypriot savers into a bailout came after banks grew so large that they dwarfed the nation’s economy, resembling Iceland’s finance industry before its collapse.
Cyprus’s bank assets swelled to 126.4 billion euros ($164 billion) at the end of January, seven times the size of the 18 billion-euro economy, from 78 billion euros in 2007, data from the European Central Bank and the EU’s statistics office show.
The Cypriot government announced an unprecedented tax on deposits three days ago, seeking European aid after its banks lost 4.5 billion euros on Greek sovereign debt and failed to meet euro area capital requirements. Troubles on the Mediterranean island have resembled those of Iceland, which seized control of its banks in 2008 when they were unable to finance debt 12 times the size of the economy.
“The banks grew as they amassed funds from wealthy foreigners and now that size is too much for the country to handle on its own,” Philipp Haessler, a European banks analyst at Equinet AG in Frankfurt, said by telephone. “Cyprus is being made an example of.”
European finance ministers on March 16 ordered Cyprus to impose a levy of 6.75 percent on deposits of less than 100,000 euros -- the ceiling for European Union account insurance -- and 9.9 percent on funds above that.
The Parliament in Nicosia began debating the measure today, which will raise 5.8 billion euros. Cyprus, which had delayed the vote on two occasions, may lower costs for smaller savers so long as it meets the target, euro area finance ministers said in a statement late yesterday. Banks are due to remain shut until at least March 21 after a holiday yesterday.
The benchmark Stoxx 600 Banks Index closed down 2.1 percent, extending declines this week to 3.5 percent. Banks from crisis-struck European nations led the drop, with Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest lender, sliding 4.8 percent to 7.23 euros.
Iceland, where an $85 billion banking industry default plunged the $13 billion economy into economic crisis in 2008, acted within its rights when it refused to cover U.K. and Dutch depositors of failed bank Landsbanki Islands hf, the European Free Trade Association Court in Luxembourg ruled in January.
Like Iceland, investors in Cypriot banks were chasing interest on deposits that looked increasingly attractive as the returns available in other parts of the euro area declined. In January, Finance Minister Wolfgang Schaeuble demanded an investigation into whether Russia is using the island as a destination for money laundering. Cypriot officials deny the country is a haven for illegal money.
President Nicos Anastasiades said today that the assembly may reject the plan because lawmakers feel it’s against the country’s interests.
Cypriot banks paid an average 4.45 percent on deposits of less than two years in January compared with 4.25 percent in 2008, according to data from the Central Bank of Cyprus. The European Central Bank slashed rates to 0.75 percent from 4 percent in the period and German banks lowered theirs to 1.5 percent from 4.01 percent.
Of the 68.4 billion euros in deposits held by non-bank clients at Cypriot lenders at the end of January, 21 billion euros, or 31 percent, was from clients outside the euro area and 7 percent from other nations inside the currency bloc, according to the Cypriot central bank.
The country’s three biggest listed lenders -- Bank of Cyprus Plc, Cyprus Popular Bank Pcl and Hellenic Bank Pcl -- had a total of 6.5 billion euros of losses in 2011 after writing down the value of their Greek bond holdings.
Russian companies and individuals have $31 billion of deposits in Cyprus, according to Moody’s Investors Services.
More than a third of the branches of the Bank of Cyprus, which held 27 percent of the country’s deposits at the end of September, are located in Russia.
Russian businessman Dmitry Rybolovlev is the largest shareholder in the Bank of Cyprus with a 9.7 percent stake held via British Virgin Islands-based trust Odella Resources, according to data compiled by Bloomberg. Rybolovlev, worth $9.4 billion, bought an apartment at 15 Central Park West, New York, for $88 million last year.
President Vladimir Putin called the tax “unfair, unprofessional and dangerous” in a statement posted on the Kremlin’s website yesterday. A spokesman for Putin wasn’t available to comment on how much Russian cash is held in Cypriot banks.
European leaders are pushing the government to tap banks’ deposits because their corporate bonds are limited in size, reducing the effect of any Greece-style haircut. The country’s small tax base also hampers its ability to raise funds.
“There was no other way as there was no debt outstanding at Cyprus’s banks that they could impair,” Christine Schmid, a Zurich-based analyst at Credit Suisse Group AG, said by phone. “There was no option. So they went after the deposits.”
The Cypriot charge on deposits is raising concern that other European states such as Spain or Italy might levy similar one-time taxes to help rescue their troubled lenders, said Alexander Friedman, global chief investment officer at UBS AG.
“The depositor bail-in sets a dangerous precedent, rendering deposit insurance partially worthless,” Friedman, who is based in New York, said in an e-mailed report yesterday. “While being flagged as an exceptional situation, this may accelerate problems of other weaker banks in the European periphery by increasing the risk of bank runs.”
The Cypriot plan is “unlikely to be a model for other EU states,” Deutsche Bank AG co-Chief Executive Officer Anshu Jain said in a speech at a conference in Frankfurt today.
Italian and Spanish banks are smaller than their Cypriot peers relative to the size of their respective economies. Spanish banking assets total more than three times the size of the economy while Italy’s banks have assets equal to more than 2 1/2 times gross domestic product.
“Cypriot banks aren’t normal but European policy makers should have seen it coming,” Klaus Fleischer, a professor of banking and finance at the University of Applied Sciences in Munich, said by phone. “Deposits are deposits regardless of where they are in Europe and with people watching this in other countries, there’s a risk they lose faith in the system.”