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A no entry sign is seen outside a branch of Bank of Cyprus UK, in central London March 18, 2013. European bank shares fell more than 2 percent on Monday as a plan by Cyprus to seize money from bank deposits raised fears that savers elsewhere may not be safe and the euro zone may be plunged back into crisis. Customers with deposits at branches of the bank in the UK are not affected by the levy. (ANDREW WINNING/REUTERS)
A no entry sign is seen outside a branch of Bank of Cyprus UK, in central London March 18, 2013. European bank shares fell more than 2 percent on Monday as a plan by Cyprus to seize money from bank deposits raised fears that savers elsewhere may not be safe and the euro zone may be plunged back into crisis. Customers with deposits at branches of the bank in the UK are not affected by the levy. (ANDREW WINNING/REUTERS)

Ordinary Cypriots and Russian oligarchs hardest hit by bailout plan Add to ...

The floundering bailout of a tiny country on the eastern fringe of the Mediterranean – Cyprus – has reignited the euro-zone crisis, roiling the debt markets and triggering political tremors whose biggest impact was felt in Moscow.

Cypriots took to the streets in protest Monday after learning on the weekend that international creditors, backed by the government, will impose a levy on bank deposits that will hit rich and poor alike. To prevent a bank run that would cripple the island’s financial system, banks will remain closed until at least Thursday.

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The deposit levy, which is being imposed to trim about €5.8-billion ($7.7-billion) from the cost of the bailout, bringing it down to €10-billion, came as a shock to Cypriots, who had assumed their deposits were safe. No other bailed-out euro-zone country – Greece, Ireland, Portugal, Spain – has forced bank depositors to fund part of its sovereign or bank-rescue packages.

The 17 countries that share the euro currency have been fighting for more than two years to contain a series of shocks to debt-burdened governments and financial institutions. Governments and central bankers around the world have pointed to the ongoing European crisis as a drag on the global economy.

Cyprus is one of the world’s most successful offshore banking centres, one favoured by Russians, who are attracted by its lax banking regulations and high interest rates of 5 per cent to 6 per cent on term deposits. But now the savings of hundreds of thousands of individuals and families stand to suffer at a time when austerity measures and the banking crisis have severely damaged the economy and sent the jobless rate soaring.

Cypriots in Nicosia, the capital, and in other cities denounced the bailout as “daylight robbery” and rushed to bank machines to withdraw cash. Reports in the Cypriot media said many machines ran out of cash and that one angry customer threatened to drive his bulldozer into a bank branch. Protests broke out in front of the parliament building in Nicosia, with protesters carrying “Hands Off!” signs.

Savers with deposits of less than €100,000 are to take a 6.75-per-cent hit; those with deposits higher than that amount are to lose 9.9 per cent. The levy is considered legal – it is being billed as a wealth tax – and therefore does not violate the insurance scheme that covers deposits of €100,000 or less.

In Moscow, Russian President Vladimir Putin denounced the levy, which will hit wealthy Russians especially hard, as “unfair, unprofessional and dangerous.”

Cyprus is one of the biggest offshore banking centres for Russian businessmen, a destination where Russians stuff somewhere between €20-billion and €26-billion. The amount is roughly equivalent to Greece’s gross domestic product.

“Confidence in Cyprus as a safe place to deposit money is going to be reduced to zero,” Anatoly Aksakov, of the Russian Association of Regional Banks, told the Interfax news agency.

But it was the “contagion” effect – the impact of the deposit raid on other struggling euro-zone countries – that worried politicians and investors most as depositors in other countries took the view that their savings may not be safe.

“Cyprus itself does not matter; the only thing that matters is contagion,” said Marshall Auerback, director of Toronto’s Pinetree Capital and a director of Institutional Partnership for the Institute for New Economic Thinking. “If large depositors in the banks of Cyprus take a large hit, it could cause a deposit run where it matters most, in a country like Spain.”

In Cyprus, President Nicos Anastasiades defended the bailout, arguing the bailout money from the euro zone and the International Monetary Fund would have been withheld if depositors were not part of the deal. If that were to happen, the Cypriot banks would have gone bankrupt, triggering economic and financial chaos and probable exodus from the euro zone. He also said that the bank-deposit levy “avoids taking other tough measures such as wage and pension cuts that were put on the negotiations table.”

The reasons behind the decision to go after depositors to finance the bailout were never made clear. It appears that, minus the deposit levy, the euro-zone leaders feared opening themselves to accusations that they were protecting Russian millionaires and billionaires in a banking system known for money laundering.

In a note, Guy Foster, head of portfolio strategy at Londons’s Brewin Dolphin, said “the widespread belief that a meaningful pool of the deposits in Cypriot banks comprises proceeds from Russian money laundering made the idea of bailing out the Cypriot banks particularly unappealing.”

On Monday, as the parliamentary vote to approve the package was delayed until Tuesday, and possibly later in the week, negotiations were under way to reduce the burden on small depositors.

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