The head of the Institute of International Finance, representing banks who agreed to take big losses on their holdings in Greek bonds that precipitated a bank crisis on Cyprus, now says that a plan to confiscate up to 9.9 percent of account depositors from the island’s banks would set an “incredibly dangerous precedent” and undermine confidence in the banking system.
Tim Adams, who wasn’t the IIF’s Managing Director when the deal was made with Greece, whose banks were also pushed into jeopardy, said that Cyprus will violate the sanctity of laws guaranteeing the safety of deposits and make customers believe the banks aren’t safe. Some analysts said they fear a run on the banks when they reopen. Cyprus ordered them closed and assets frozen until at least March 21.
The plan is part of a deal for Cyprus to get a 10 billion euros ($13 billion) bailout from international lenders who want depositors to fork over 5.8 billion euros ($7.5 billion) to help pay for the total cost of saving the banks and the economy although the customers had nothing to do with the crisis.
“Crossing the Rubicon of addressing insured deposits and undermining the explicit guarantee – you can call it a tax or whatever you want – but essentially the broken guarantee opens up lots of different possibilities for destabilizing effects in the short term, medium term and long term,” Adams said in an interview with the news agency Reuters.
“The next time there is a crisis in any one of these countries, depositors are going to ask themselves, why am I going to stick around to see if the same set of rules are applied or not? I do think it is an incredibly dangerous precedent, without question,” he added. The IIF is the world’s largest international lobbying group for financial firms, with more than 450 members.
Adams warned that savers in other larger European countries could become nervous and start withdrawing their money. “It is the medium term that is concerning. What happens if we’re back at Spain, Portugal or Italy at some point six months from now, and the same set of issues arise?” he said.
Under the deal, that has been revised, bank deposits in Cyprus under 20,000 euros won’t be touched but those up to 100,000 euros will lose 6.75 percent of their money and holdings over that will be taxed at 9.9 percent, along with up to 25 percent of earned interest.
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