The unprecedented decision to tap all bank accounts in Cyprus as part of an EU bailout is a threat to the entire economy of the Mediterranean island, an important financial center, analysts say.
“The damage will be long-lasting,” said Fiona Mullen, an economic analyst specializing in Cyprus.
“Business and financial services were the only sectors generating jobs and tax revenue, and they have just had a double whammy with both the increase in corporate tax and the hit on deposits,” she told reporters.
Early on Saturday, the government agreed to the levy on bank deposits in return for a desperately needed 10 billion euro (US$13 billion) bailout that will also see an increase in corporation tax from 10 percent to 12.5 percent.
Savers reacted with shock and anger at the bank deposit levy of up to 9.9 percent — the first eurozone bailout in which private depositors are having to help foot the bill.
At the same time, an additional “withholding tax” would be imposed on interest on bank deposits.
According to Marios Skandalis, vice president of the Cyprus Institute of Certified Public Accountants, “there is a very high risk that this could be the end of Cyprus as a strong and reliable financial center.”
“Both measures target a major sector of the Cypriot economy and will in the end have a negative impact on GDP,” he said.
“The whole banking system is based on trust. If the trust is lost, the whole system is going to collapse,” he added.
The announcement early on Saturday ahead of a long holiday weekend in Cyprus sparked a brief run on banks, with depositors withdrawing cash from ATM machines in a desperate bid to reduce the amount they will have to pay on their deposits.
For German political analyst Hubert Faustmann, tapping the bank accounts of ordinary depositors is “an experiment.”
“Economic analysts don’t know how investors will react,” the Nicosia-based analyst told reporters.
“The fallout is unpredictable,” with no one knowing what will happen tomorrow when the banks reopen after the long weekend, he added.
“People who benefit from the status of the island as a tax haven and potential money launderers will pay their share, and that should satisfy German public opinion — but these measures also hit everybody else, and they can potentially kill the island,” Faustmann said.
Economist George Theocharides told Cyprus’ Sigma TV that the levy on bank deposits could raise a potential 20 billion euros.
“It seems all deposits are affected and each account at each bank will be cut. The consequences are not just bad for Cyprus, but negative for other eurozone countries and financial sectors,” he said.
“They opened a Pandora’s box,” Faustmann said.
“The question is: Can it happen elsewhere?” he asked of a levy on deposits.
“They set a precedent which might have a domino effect: what if investors in all bailed-out EU countries decide to withdraw money?” he added.