‘Tailored’ Cypriot bank levy bailout unlikely to affect Malta

While Cypriot bank account holders have been queuing at ATMs over the weekend to withdraw as much money as they can to avoid getting hit by a hefty bank levy on their savings, Maltese account holders can rest easy.

Local economists John Cassar White and Gordon Cordina agree that the Cypriot bank levy measure not only was tailored specifically to the Cypriot situation, but that it is unlikely that Maltese account holders would ever be subject to similar levies.

The Cypriot bailout comes in the wake of even greater financial troubles, which saw Greece receiving a €110 million bailout loan on condition that it imposes, among others, strict austerity measures.

Due to Cypriot banks' crippling vulnerability to the Greece economy, the small Island State - which is also reputedly an offshore Russian tax haven - is now also facing imminent economic meltdown.

To avert the collapse of several Cypriot banking institutions, European Union (EU) leaders are opting for a €10 billion loan from the EU and International Monetary Fund (IMF), to rescue its banks.

However for the first time in the ongoing eurozone crisis, ordinary savers would suffer a 'haircut' on their bank accounts by being called upon to pay a one-time tax to bring down the country's debt level.

The initial rates proposed - 6.75% on accounts containing up to €100,000, and 9.9% for accounts exceeding €100,00 - were revised following public outcry on Monday in favour of a plan whereby those savings containing less than €20,000 are exempt.

Keeping in mind that of the estimated €68 billion held in Cypriot bank accounts, about 40% belongs to foreigners - most of them thought to be Russians - it is no surprise that Russian leaders reacted angrily.

The levy has been also criticised as being likely to cause a run on Cypriot banks.

Already, many account holders have flocked to ATMs to withdraw as much as their daily allowance would permit, causing banks to be ordered shut until at least Thursday. The local stock exchange also remains closed.

Cypriot leaders held crisis talks on Wednesday to avert financial meltdown after rejecting the terms of a European Union bailout on Tuesday evening, and throwing efforts to rescue the latest casualty of the euro zone debt crisis into disarray.

'Tailored bailout'

Speaking to MaltaToday, economist John Cassar White said that the bank levy represents a message from the EU Commission that the EU is not prepared to solve Cyprus' financial crisis with EU taxpayer money alone, but that they expect Cypriots to shoulder part of the pain.

He added that Germany's impending elections, and the need to "sweeten the proposed bailout with the German taxpayers" motivated Germany to push EU leaders into taking a stand.

Speaking about the unprecedented bank levy, Cassar White said it represents not only at attempt to shore up Cyprus' economically crucial financial institutions, but also an attempt by EU countries to address the country's banking reputation as a tax haven, and as a haven for Russian money laundering.

"The European Commission wanted to enact measures that would bring about a degree of control on the Cypriot banking sector, and address how it was being used as a tool to launder money and even allow tax evasion in Russia," he said. "With this measure, they wanted to hit the banks directly."

He also added that despite the debates regarding how fair the proposed levies were, "the pain had to be carried by someone" and that this option was felt to be "more socially equitable than if the burden were imposed on the country's taxpayer as a while".

Cassar White also said that the bank-levy was unprecedented insofar as it was tailored specifically for the Cypriot situation, its disproportionately large unregulated banking sector, and its dependence on it.

"In imposing measures that directly affect Cyprus's banks, the EC and the IMF attempted to tailor the bailout to the country's specific circumstances, in a bid to address specific weaknesses."

"This has shown us that whenever the bailout is needed, the EC and IMF will start considering each country's specific needs." 

He however said that such a 'model' would not be applied to other countries "because - taking Italy an as example - Italy's economic problems do not stem from its banking system in the same way as Cyprus' issues."

In comments to MaltaToday, economist Gordon Cordina also noted that the unprecedented bank levy gives rise to many questions regarding 'fairness', especially how it also applies to accounts containing relatively small amounts.

He noted that there are several elements to consider, among them the presence of questionable Russian funds deposited in Cypriot banks, as well as Cypriot bank account holders themselves, who have been trying to withdraw as much money as they can until the banks closed on Monday.

Another factor to consider is whether this model is liked, and also adopted for other countries. "Other small deposit holders could be affected by this," he said, noting, "there doesn't seem to be a clear-cut bottom line".

"What is certain however is that every bailout needs to see where to secure funding from," Cordina however noted, adding that such a levy is nevertheless preferable to a an economic collapse brought about by folding banks, or tax hikes across the board as had happened in Greece.

He also noted that bank account deposits "represent an immediate and apparent source of accessible funding", which might have been seen as preferable to other options, such as income tax increases, which would have needed to be collected over time and prone to other complications such as tax evasion.

"Given the circumstances, it might have been perceived as the easiest, and also possibly the fairest. But doesn't means it will be applied in the same way in all countries," he said, adding however that "it could serve as an interesting case study that could be in future considered in other countries".

'Hot money' and Maltese prudence

Asked whether the Cypriot crisis could affect Malta, Cassar White stressed that that Malta stands next to no risk of contagion from Cyprus and its financial woes. 

"Malta is completely different from Cyprus. Our banking system is managed very prudently, and Cyprus' bailout - including the bank levy - is an extraordinary measured tailored for Cyprus alone."

He however noted that the first consequence of the Cyprus bailout, with its deposit levy, is that there will be a lot of what he described as "hot money" seeking a new "haven".

"We need to be very careful that Russian money does not start coming to Malta and be accepted as if it were normal funds. We should not make [Cyprus'] problem our problem," he said.

"Our banks should remain prudent and not risk involving themselves in questionable money laundering issues. We should not become the new Cyprus," he warned.

Cassar White adds that Malta's banking sector is similar to that of Cyprus in so far as it also comprises a large proportion of Malta's Gross Domestic product, and instead that Malta should keep diversifying its economy and not rely on a handful of sectors. 

"While we should do all we can to keep encouraging the banking sector, we must ensure that other sectors also develop and grow to lessen dependence. We need to be careful to nurture a balance and diversified economy."

Cordina similarly said that that the Cypriot bailout model might not spread to other countries, and insisted that the implications of the Cypriot crisis for Malta are very far off.

"Malta's leading banks are strong, very prudent, and also very local-oriented," he said. "As long as both the economy and employment remain strong, there are not risks for Malta's banks fort he foreseeable future."

Cordina added that even in situations of increased unemployment and economic recessions, Malta's banks are still expected to do well. 

"Stress testing done in the past show that local banks can nevertheless withstand certain shocks such as this," he said.

'Know who you are banking with'

Cordina underscored that the lesson that local account holders should take away from this is the importance of knowing what one's bank is up to, and how it does business.

"What is however important is that each of us are aware of the banks that we are banking with and their practices, and that the authorities take care to inform depositors regarding the risks that individual banks are taking."

He also emphasised on the need of strong regulatory entities that are proactive in ensuring that depositors are informed on banks' activities that could endanger their deposits.