Five reasons the Cyprus crisis shouldn’t lead to a run on the banks – but might anyway

feature-eurodolalr-200A financial bailout plan for the tiny economy of Cyprus – the island south of Turkey that makes up just .25% of the Eurozone economy – has provoked international headlines for one reason only: its decision to impose a levy on bank depositors in exchange for a bailout from the European Union.

Under the agreement with the Cypriot president, Nicos Anastasiades, anyone with a deposit in a Cypriot bank – individuals or companies – will pay the levy, which is 9.9% for deposits over 100,000 euro and 6.75% for deposits under that amount. In return, depositors will get shares in their own banks, and those who keep their money in the bank will be given bonds linked to the revenues of natural gas projects.

Stock markets in America, Europe and Australia fell in reaction to the news from Cyprus, where distressed locals spent the weekend queuing at ATMs in a desperate bid to withdraw funds before the levy affects them. It takes effect from Tuesday, after a public holiday.

The crisis in Europe comes as a surprise – the world economies and investors were reassured by the promise by the ECB last year to do whatever was needed to ensure the survival of the euro.

Before that commitment, depositors had been fleeing banks in the struggling economies of Spain, Italy, Greece and Ireland in case they suddenly found their banks full of worthless pesos or lira.

Ironically, the Cypriot banks will be stronger as a result of the move to shore up their capital base, so there is less risk of a collapse, says Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.

There are strong reasons for the unprecedented action of snatching money from depositors that make it very unlikely to occur elsewhere in the eurozone.

But these reasons may not be sufficient to prevent bank depositors across all the countries in the eurozone from starting to worry that the same may apply to them. Oliver says: “If people think there might be such a deposit tax in the future, they may start to rush to their ATMs to get their money out.”

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