Cyprus decision sets dangerous precedent, Barclays says

The decision to impose losses on Cypriot depositors is the latest erosion of bondholder protection at European banks and an «ominous» sign of how bailouts are being handled, Barclays Plc (BARC) said.

Investors need to be better aware of national resolution frameworks, with Switzerland, Britain, the Netherlands and Germany being the riskiest for bondholders, Barclays, Britain’s second-largest bank by assets, said in a report.

“The imposition of a levy on depositors in Cyprus is a material development that furthers the erosion of bondholder protection at European banks,” London-based Barclays said in the report. “We believe the expropriation of SNS Reaal subordinated bonds, the imposition of losses on Anglo Irish senior bonds and the haircuts of depositors in Cyprus form an ominous trend.”

Euro-area finance ministers early Saturday morning agreed to an unprecedented tax on Cypriot bank deposits as part of a 10 billion-euro rescue plan for the country, the fifth since Europe’s debt crisis broke out in 2009.

Cyprus will impose a levy of 6.75 percent on deposits of less than 100,000 euros – the ceiling for European Union account insurance – and 9.9 percent above that. The measures will raise 5.8 billion euros, in addition to emergency loans.

The unprecedented decision to «bail-in» depositors underscores the lack of progress on a Europe-wide deposit protection system, Barclays said in the report. It was signed by Laurent Fransolet, the bank’s head of European fixed-income strategy, and Antonio Garcia Pascual, Barclays’s chief economist for southern Europe.

The risk of the Cypriot rescue package leading to deposit outflows in other troubled euro countries is less than it would have been at the time of the Irish rescue in 2010, Barclays said. Peripheral banks are better capitalized than they were then, the European Central Bank has stepped up its support for the region’s banks and the determination to keep Greece in the single currency has reduced redenomination risk, the bank said.

Cyprus was also a special case, it said, with 30 percent of deposits coming from non-euro countries. The size of Cyprus’s bank recapitalization needs, at 80 percent of economic output, dwarfs Ireland at 40 percent, Greece at 27 percent, Spain at 6.5 percent and Italy at nothing.

Erik Nielsen, chief economist at Milan-based UniCredit SpA (UCG), said Cyprus is a special case because its banking system was eight times larger than its economy.

“I would assume that anyone in Spain, Portugal or elsewhere who knows about the taxation of Cypriot depositors also would know that the Cypriot banking system is a very different animal than anywhere else in the euro zone,” Nielsen said in a report to investors.


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