Tiny Cyprus Stokes Major Deposit Fears
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Tiny European country Cyprus is big news on Wall Street Monday on news that regulators will impose a levy on Cypriot depositors to finance the bailout of the country which is out of options. Despite the country accounting for less than half a percent of the euro-area economy, the implications have sent shock-waves throughout the financial markets. If Cyprus deposits aren't off limits, then whose deposits are safe? Fears of contagion have spread across markets.
According to the deal, Cyprus has agreed to impose a tax of 6.75% on bank deposits up to €100,000 and 9.9% on deposits above €100,000 as a pre-requisite for a €10bn support package. This should raise €5.8bn according to official estimates. All Cypriot depositors would be compensated for the levy with shares of Bank of Cyprus (BoC) and Cyprus Popular Bank (CPB), according to the government.
A scheduled vote from the Cypriot Parliament on the matter has been postponed to Tuesday.
Banks in the country, first scheduled to re-open on Wednesday, are now closed until Thursday and a bank run cannot be avoided, according to analysts at Berenberg. "We believe that Cypriot retail depositors will try to withdraw their life-savings on Wednesday (and keep them at home or deposit them abroad) and corporate onshore and offshore depositors would choose to bank in another country," analysts said.
Berenberg sees risk of contagion to Greece. "Even though the deposits of the
Greek branches of the Cypriot banks will not be part of the bail-in, there is still a risk of a bank run (or a milder bank "jog") of BoC and CPB in Greece on Tuesday (Monday is a bank holiday for Greece)," the said. "The Greek deposits of the large two Cypriot banks are €12.5bn as at September 2012, which may be gradually transferred to other Greek
banks, unless an immediate sale can be agreed next week."
The recent levy imposed on Cypriot depositors will increase equity risk premium and cost of funding of (i) banks with weak capital ratios and (ii) banks operating in the eurozone periphery exposed to sovereign risk, in the view of Berenberg. "... the contagion from Cyprus is fairly limited but there is a tail risk that this measure could backfire. Solvency and liquidity risk are back on investors' agenda."
"Every 1% increase in cost of equity reduces banks' price targets by c.10%," according to the firm's estiamtes. "An increase in periphery banks' cost of funding should put further pressure on banks' net interest income, reducing revenues and bottom-line earnings. Weaker banks may lose access to wholesale funding altogether."
According to the deal, Cyprus has agreed to impose a tax of 6.75% on bank deposits up to €100,000 and 9.9% on deposits above €100,000 as a pre-requisite for a €10bn support package. This should raise €5.8bn according to official estimates. All Cypriot depositors would be compensated for the levy with shares of Bank of Cyprus (BoC) and Cyprus Popular Bank (CPB), according to the government.
A scheduled vote from the Cypriot Parliament on the matter has been postponed to Tuesday.
Banks in the country, first scheduled to re-open on Wednesday, are now closed until Thursday and a bank run cannot be avoided, according to analysts at Berenberg. "We believe that Cypriot retail depositors will try to withdraw their life-savings on Wednesday (and keep them at home or deposit them abroad) and corporate onshore and offshore depositors would choose to bank in another country," analysts said.
Berenberg sees risk of contagion to Greece. "Even though the deposits of the
Greek branches of the Cypriot banks will not be part of the bail-in, there is still a risk of a bank run (or a milder bank "jog") of BoC and CPB in Greece on Tuesday (Monday is a bank holiday for Greece)," the said. "The Greek deposits of the large two Cypriot banks are €12.5bn as at September 2012, which may be gradually transferred to other Greek
banks, unless an immediate sale can be agreed next week."
The recent levy imposed on Cypriot depositors will increase equity risk premium and cost of funding of (i) banks with weak capital ratios and (ii) banks operating in the eurozone periphery exposed to sovereign risk, in the view of Berenberg. "... the contagion from Cyprus is fairly limited but there is a tail risk that this measure could backfire. Solvency and liquidity risk are back on investors' agenda."
"Every 1% increase in cost of equity reduces banks' price targets by c.10%," according to the firm's estiamtes. "An increase in periphery banks' cost of funding should put further pressure on banks' net interest income, reducing revenues and bottom-line earnings. Weaker banks may lose access to wholesale funding altogether."
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