Cyprus yesterday secured a last-minute bailout deal but the messy run-up may have challenged the perception that bank deposits elsewhere are a safe investment, according to a retired banker.
With a mentality of keeping money under the mattress still prevalent in sections of the population, the negative perception will not help
Anthony Curmi, a former Barclays and Mid Med Bank general manager, ruled out the Cypriot crisis having any effect on Malta but insisted the levy on bank deposits proposed initially may have stoked concern.
“It worried me because with a mentality of keeping money under the mattress still prevalent in sections of the population, the negative perception will not help,” he said.
His concern was shared by former finance minister Tonio Fenech who, writing in The Times (see back page), said the decision to introduce a levy across the board penalised bank depositors at the expense of those who did not save or who invested elsewhere.
Mr Fenech said the decision – since then retracted – could create “a further level of distrust in the banking system by savers and investors”.
Cyprus secured the €10 billion bailout agreement with eurozone finance ministers, the European Central Bank and the International Monetary Fund after it pledged to wind down its second largest bank, the Popular Bank of Cyprus, and take measures to restructure its economy.
Deposits below €100,000 will be guaranteed – this will preserve the European depositor guarantee scheme that was almost nullified by the levy proposal.
The deal came as Cypriots faced hard times imposed by strict controls on the amount of money they could withdraw from ATMs, a measure implemented by the island’s government to stop a run on bank deposits.
The fear of a bank run was sparked last week when the levy was first proposed but it failed to go away even after Cypriot lawmakers voted it down. Banks in Cyprus are slated to reopen today but it is unclear whether controls on withdrawals will be lifted.
The terms of the bailout agreement were welcomed by Finance Minister Edward Scicluna, who said the joint statement issued on Sunday “respected the dignity of the Cypriot people”.
He said the agreement let the Cypriot authorities decide the appropriate administrative measures they deemed fit to solve the exceptional situation in their financial sector.
This was different from the agreement hammered out a week earlier that went into detail instructing the Cypriot authorities what to do.
“Once we are satisfied that the deposit guarantee is respected we should offer all the assistance we can give, including the €10 billion euro bailout together with the ECB’s emergency liquidity arrangements to contain the mishap which has befallen Cyprus,” Prof. Scicluna said in a statement.
Under the agreement, account holders with funds in access of €100,000 will have their money frozen and stand to lose at least 40 per cent of their money to make up for the banking system’s failure.
The move was targeted at the Russian oligarchs, who put their money in Cyprus, but it will also hurt legitimate businesses and depositors.
Although the anticipated flight of Russian money from Cyprus once banking restrictions are lifted has created ripples in financial circles, practitioners in Malta have not reported any queries.
Mr Curmi had no qualms about the robustness of the domestic banks and the controls introduced over the years to sift through customers.
“Over the years banks took precautions to know their customers. We have always been careful not to allow Russian funds of dubious provenance to flood our system,” he said.
His analysis is shared by operators in the financial services sector.
Jesmond Mizzi, a financial adviser, said the sector has always been very vigilant and cautious with funds coming from abroad.
This prudence may have come at the expense of stunting growth in the financial services sector, he added, but it helped avoid the Cypriot conundrum of a sector inflated with Russian money of a dubious nature.
It was this Cypriot economic model with a super-sized financial sector that European Commission president Jose Manuel Barroso yesterday described as “unsustainable”.
With a financial sector much larger than its GDP, Cyprus built a reputation of being a haven for Russian money launderers and this was a concern for several Member States, Mr Barroso added.
Speaking in Brussels at a midday briefing on the Cyprus deal, Mr Barroso said the Mediterranean island state had accepted an independent evaluation of its anti-money laundering legislation.
“Cyprus has a huge financial system compared to GDP and the way it was structured was not sustainable, especially after the Greek sovereign debt crisis. There has to be a severe process of deleveraging of the financial sector,” Mr Barroso said.
A Brussels-based task force will provide technical assistance to the Cypriot Government and issue quarterly progress reports.
The deal struck in the early hours of Monday staved off “a disorderly default” as Cyprus faced bankruptcy “as of this week”, Mr Barroso added.
Cypriot banks suffered a massive hole in their finances last year when creditors were forced to accept a haircut on investments in Greek bonds.
But as Cypriots come to terms with the situation, Mr Mizzi believes the crisis has served “an eye opener” for investors to assess banks on their individual strength rather than the €100,000 deposit guarantee.
“The Cypriot Parliament did right to vote down the original levy on all deposits because if it had not done so the deposit guarantee scheme would have blown up in people’s faces,” he said.
But clients were more cautious, Mr Mizzi added, when banks offered higher than average interest rates. “The first question they ask is whether the bank is safe, irrespective of the deposit scheme.”
ksansone@timesofmalta.com