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Cypriot Haircut of Bank Deposits, Sends Shockwave Through Europe

To the surprise of analysts it was announced over the weekend that as part of the bailout agreement, Cypriot bank deposits would be imposed with a levy, or a so-called tax. The bailout terms are harsh in comparison to many, with the unprecedented terms effecting individual investors directly. The situation is fluid, and the initial terms of the “tax” are rumoured to have changed, with government officials in discussion on how to move forward. Today and tomorrow are now bank holidays on the island, with further announcements expected in the coming hours as to the final terms.

Cyprus is a small island which only contributes an estimated 0.2% to Eurozone GDP.  It is estimated that around a third of the €70bn of funds held in deposit in Cyprus are Russian, and the country is regularly criticised for its lack anti-money laundering controls. 

Analysts were quick to criticise the plan to levy individuals as the Cypriot government has gone back on its word that bank deposits would be safe. The move has been cited by some as the end of the single currency, with others stating this could set a precedent for any future bailouts in the EU.

Since the start of the Eurozone crisis, there had been outflows of deposits from crippled economies (Portugal, Greece & Spain). The latest move could trigger a run on the Cypriot bank system, as confidence in the islands banking system is hit and investors move funds to the usual safe havens (CHF, GBP, USD). This development has caught many off guard, with a measure meant to help solve a single nations financial difficulties, has reignited fears throughout the Eurozone.

Under the initial IMF and EU terms released on Saturday:

Tax of 9.9% would be levied on deposits over €100,000

However deposits of fewer than €100,000 would be taxed 6.75%

Latest reports:

Certain media outlets are reporting that smaller accounts, being mainly residents and non-corporates would be taxed a smaller amount, with a tiered levy for larger accounts, primarily institutional accounts.

-Banks in Cyprus are closed until Wednesday

-Reports are that Cypriot banks have stopped access to their online banking

-The Cypriot government will announce further details today

-Gold has traded above $1,600/oz as traders seek safe-havens

-Euro gapped on the Sunday open in Asia with EURUSD trading with a 1.29 handle

How does this effect CySEC brokers?

As the Cypriot financial centre has grown in recent years, there has been a multitude of brokers operating under CySEC licenses. Reports are from well-known industry blogs such as LeapRate and ForexMagnates that the majority of larger CySEC brokers hold funds overseas and would be unaffected. However this latest development is a blow to the credibility of the island, and is likely to unnerve many investors as to the security of their funds that held on account with CySEC regulated brokers.

Since the announcement on Saturday morning, Abshire-Smith employees have been in the office due to the unprecedented level of enquiries from potential institutional clients interested in transferring their funds to us. Abshire-Smith is an FSA regulated broker, and our client funds are held in segregated accounts with UK banks.

If you have any questions regarding our regulatory details or opening a trading account with Abshire-Smith please contact us.

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