'Legalised bank robbery' as EU plans to raid savings in Cyprus

Markets and savers across Europe have been left panicking as a plan to take money directly from private citizens’ savings accounts nears fruition.

Not only have returns on savings been awful for years, the money itself is now at risk after the terms of an EU bailout have come to light in Cyprus.

The announcement at the weekend that Cyprus would impose a tax on bank accounts as part of a €10 billion bailout sent a shiver across the EU seeing customers queuing to withdraw their cash, the euro to tumble and stock markets dive.

Residents on the island emptied its cash machines to get their funds over the weekend.

"Essentially parliament is called to legalise a decision to rob depositors blind, against every written and unwritten law," said Yiannakis Omirou, speaker of Cypriot parliament and head of EDEK, the small Socialist party.

The worst fear is that savers in other European countries could become nervous and start withdrawing funds, creating a continent-wide bank run.

"Despite reassurances from Brussels that Cyprus is a special case and that indiscriminate levies won't be a common policy tool, depositors across Europe are doubting their sincerity and are fearing that a new precedent has been set for other debt-laden euro zone countries," Jonathan Sudaria, dealer at Capital Spreads, said.

"It's as if the Europeans are holding up a neon sign, written in Greek and Italian, saying 'Time to stage a run on your banks!'" US economist Paul Krugman wrote in The New York Times.

Politicians in Cyprus are voting on the deal on Tuesday.

How has it come to this?

The deposit tax is part of a bailout agreement reached this weekend after talks by finance ministers from euro countries and representatives of the International Monetary Fund and the European Central Bank.

In exchange for €10 billion (£8.6 billion) in rescue money, creditors would impose a one-time tax of 6.75% on all bank deposits under €100,000 euro (£86,500) and 9.9% over that amount.

Cypriot banks got into trouble after losing some €4.5 billion (£3.9 billion) on their Greek government bond holdings after eurozone leaders decided to write down Greece's debt last year.

The raid on savings is expected to raise €5.8 billion (£5 billion) to recapitalise the nation's banks and service the country's debt.

The government says Cyprus has no choice but to accept the bailout with the levy on deposits, or it will go bankrupt.

Are British savings at risk?

After Icelandic banks defaulted leaving tens of thousands of British savers at risk, the UK government has rushed to protect Britons from this latest assault on savings.

The Government in London has said it will guarantee the deposits of its military service members stationed there, while there is no effect on deposits with Bank of Cyprus UK Limited which is a UK bank.

However, the UK ex-pats with money in Cypriot bank accounts could well be hit along with other residents of the island and some foreign investors.

Russians hardest hit

Wealthy Russian depositors have put vast sums into Cyprus's banks in recent years, seeing Russian president Vladimir Putin describe the savings raid as unfair and setting a dangerous precedent.

"While assessing the proposed additional levy on bank accounts in Cyprus, Putin said that such a decision, should it be made, would be unfair, unprofessional and dangerous," Kremlin spokesman Dmitry Peskov told journalists.

Russian citizens account for the majority of the billions of euros held in Cypriot banks by foreign depositors, and Russian banks are heavily exposed to the island as a favoured offshore centre for big business.

There are almost €70 billion in deposits held in Cyprus. A little less than half that is held by non-residents, most believed to be Russian.

That figure is more than twice the size of the bailout, which had been repeatedly delayed amid concerns from other EU states that the close business and banking ties with Russia made Cyprus a conduit for money-laundering.

It ranks as the largest source of foreign direct investment into Russia - money that is largely Russian in origin.

Moscow is considering extending an existing €2.5 billion loan to help bail the island out.

Will it definitely happen?

Faced with a growing public backlash, the government was working on a plan to soften the blow to smaller savers, by tilting more of the tax towards those with deposits greater than €100,000.

A source close to the deal told Reuters authorities were hoping to cut the tax to 3% from 6.7% for deposits under €100,000. The rate for deposits above that would then be jacked up to 12.5% from 9.9%.

Approval in the 56-member parliament is also far from a given: No party has an absolute majority and three parties say outright they will not back the tax.

Savers who lost money would be compensated by shares in commercial banks, with equity returns guaranteed by future revenues expected from natural gas discoveries. But many politicians remain unconvinced.

[Source: Reuters]