European Banks Slide as Cyprus Levy May Threaten RatingsNicholas Comfort
European banks declined on concern an unprecedented tax on savings in Cyprus will have negative implications for the ratings of the continent’s lenders.
The Stoxx 600 Banks Index dropped as much as 2.4 percent, led by banks in crisis-hit Italy and Spain. UniCredit SpA, Italy’s biggest bank, slumped 5.2 percent to 3.63 euros at 1:20 p.m., the lowest level in three months. Societe Generale SA lost 5.3 percent to 28.40 euros in Paris.
European finance ministers reached an agreement on March 16 forcing depositors at Cypriot banks to share in the cost of the latest euro-zone bailout. Moody’s Investors Service said the decision, due to be voted on in the Cypriot parliament tomorrow, may hurt the confidence of savers at European banks and limits support for bank creditors in the region.
“The psychological crux is that savers can now be called on to contribute to bailouts and it might have been smarter to let deposit insurance do its job,” Ingo Frommen, a banking analyst with Landesbank Baden-Wuerttemberg in Stuttgart, said by telephone.
The measures would raise 5.8 billion euros ($7.6 billion) by taking a piece of every bank account in the country. Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere.
Goldman Sachs Group Inc. said the steps may unnerve deposit-holders in the nations most impacted by the European debt crisis.
“It is reasonable to expect that the deposit volatility in stressed sovereigns could rise,” Goldman Sachs analysts including Jernej Omahen wrote in a report to investors. Still, any response from depositors in Italy, Ireland, Spain and Portugal will probably be limited as their “perception of banks has improved,” they said.
UniCredit also led the credit default swaps of European banks higher, with contracts on senior debt rising 21 basis points to 344.
While criticizing the plans as “setting a dangerous precedent,” UBS AG expected “no immediate bank runs in other countries,” analysts including Thomas Wacker said in an e-mailed report.
Moody’s said the support package for Cyprus reduces the immediate risk of a restructuring of its sovereign debt. European banks had $39 billion in claims in Cyprus as of Sept. 30, according to Bank for International Settlements data.
“While raising the risk of deposit flight out of peripheral banking systems, the agreement reflects euro-area policymakers’ desire to avoid sovereign defaults in addition to Greece’s,” the ratings company wrote in its credit outlook.
The outcome of tomorrow’s vote on the measures, delayed today for a second day, will be key to determining the direction of asset prices, Frommen said. President Nicos Anastasiades’ government has 20 seats in the 56-member assembly. Diko, which supported him in his election last month, holds eight seats.
The plan has “broken trust in a way that is similar to the taboo that was originally broached in Greece and risks pushing citizens further away from Europe,” Frommen said. “Stocks could improve depending on how the vote goes, but if we see runs on banks or violence then Europe could shiver.”
Russian President Vladimir Putin called the tax “unfair, unprofessional and dangerous,” according to a statement posted on the Kremlin website. Russian companies and individuals have $31 billion of deposits in Cyprus, according to Moody’s Investors Services.
Cypriot banks had 68.4 billion euros of deposits from clients other than banks at the end of January. The planned levy -- 6.75 percent of all deposits up to 100,000 euros and 9.9 percent above that -- would whittle down the euro-area’s bailout of Cyprus to 10 billion euros from 17 billion euros, near the size of the nation’s 18 billion-euro economy.