-- Posted Monday, 25 March 2013 | | Disqus

After all-night talks EU foreign ministers have agreed a new bailout package for Cyprus but one that imposes much tougher penalties on large depositors than the first deal. Depositors with more than 100,000 euros at the Cyprus Popular Bank will be wiped out while those holding more than that sum at the Bank of Cyprus will lose 40 per cent.

The draconian move on larger depositors will inevitably provoke a run on the banks in other heavily indebted EU nations with fragile banking sectors, namely Spain, Portugal, Greece and Ireland. At the very least depositors will want to split larger amounts to hold no more than 100,000 euros in any single bank.

New deal

The latest 11th-hour Cyprus agreement calls for Cyprus Popular Bank closed and split. Bank of Cyprus will take over the viable assets of the failed bank along with nine billion euros in central bank-provided emergency liquidity aid, reported Bloomberg this morning citing EU officials.

Deposits of less than the EU deposit-guarantee ceiling of 100,000 euros will be protected, but the uninsured depositors at Cyprus Popular are to be ‘largely be wiped out.’

Having safeguarded the majority of smaller depositors the way should now be open for the Cyprus parliament to approve the deal and avoid a financial collapse. The cost, however, is very high and not only for the non-insured depositors. The island’s lucrative offshore banking sector is in tatters and its reputation irreparably ruined.

Will EU finance ministers live to regret their action? It works at the democratic level but is something of a disaster for the EU banking system which will now have to suffer another round of damaging bank runs by larger depositors scared about losing their money in a future banking collapse.

Fear is contagious

Ironically it is that very fear that now might cause another banking failure elsewhere. Banking is a matter of trust and confidence. The fall-out from the Cypriot banking affair is not going to be nearly as easily contained as signing off a rescue might appear to make it.

Can EU banks now be trusted as custodians of larger sums of money? Well yes, evidently some can and some cannot. The marketplace will now decide which banks close next.

The winners are going to be the banks of Germany and Austria, and outside the EU money will seek new financial centres like Istanbul and Dubai, though probably not Beirut or Bahrain given current security issues. The UAE gave an unlimited, three-year guarantee to all its bank depositors in the global financial crisis.

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-- Posted Monday, 25 March 2013 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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