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Cyprus Bailout: Impacts Confidence in Eurozone Banks and Currency

March 19th, 2013
in contributors, syndication, forex

by Mike Ber, Forex Alerts

bankerthrowingmoneyUnder the deal struck with international lenders on Saturday, a 6.75% levy would be applied on all deposits under 100,000 Euro, and the rest of the accounts would be hit with a 9.9% levy. The latest reports circulating on Monday indicate that there is a high chance for the levy distribution to change: 3% levy would be applied on all deposits under 100,000 Euro, 12-14% levy on larger accounts.

In many articles online authors describe Russians as being tax-evaders that laundering money through the Cyprus banking system. The widespread notion is that Russians didn’t earn their money honestly, and Cyprus can proceed with taking away some of their deposits to save its banks. The vast majority concludes that Cyprus is a separate case from the rest of the Europe, very small and insignificant in terms of European input, and the terms of the bailout agreement won’t affect the rest of the Europe at all.

Follow up:

Russians park approximately 50 billion Euro in Cyprus banks, in addition to that 35,000 Russians actually live in Cyprus. Most of the funds belong to large publicly traded companies such as Gazprom and Lukoil. Even if we ignore the facts, and assume that all the Russian funds in Cyprus belong to tax-evaders, we should realize that these Russians owe the tax to Russia, and Cyprus always considered all these deposits to be legal. We can’t treat Russian deposits differently.

I think this bailout will backfire. Europeans should stop looking for an excuse to levy Russian or other foreign depositors. Deposits from everyone should be treated as deposits! Foreign investors hold under half of all bank deposits in Cyprus, which is around 70 billion Euro total.

Let’s ask ourselves one simple question: “Would you continue dealing with the bank if your deposits were levied 10%?”

We all will move the funds to another bank, right? Why do we think that Russians and other foreigners will act differently? Do you really believe that somebody would want to continue dealing with Cyprus banks after the levy imposed?

Whoever came up with these bailout terms, this group of people didn’t take into consideration the big picture, and didn’t take interests of Cyprus into consideration. If this bailout will go through, there is a very high chance that a large portion of foreign cash will flee Cyprus within a short period of time. This development will be very negative for the Euro, and will reaffirm our bearish outlook for EUR/USD.

EUR/USD opened 160 pips lower on Monday, but half of its loss was recovered by the end of the day. In the medium term the pair is continuing to trade in a bearish fashion. We came down a lot, and very likely that the pair is going to trade sideways within our range 1.2838 – 1.31391. We will update our members if the levels will change.

EU(1)

The European Union was designed as a free zone for the Euro currency to flow. The levy on deposits may lead to capital controls, because there is increased chance of bank runs. Any introduction of the capital controls may defeat the original purpose of the Euro.

Let’s put all this into perspective: Cyprus will get 10 billion bailout funds. In return, the trust in its banking system will vanish, and at least half of foreigners deposits (35 billion) will be moved to other banks. Is it worth it?


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