FT 25 Mar 2013: Small banking islands will suffer from the Cyprus bail-out

Category: Newspaper & Media Reports

 

From FT Blog: http://blogs.ft.com/businessblog/2013/03/small-banking-islands-will-suffer-from-the-cyprus-bail-out/

The chaos over the rescue of Cyprus – under which insured bank deposits were initially threatened but have been reprieved – has raised questions about whether depositors in other eurozone countries will feel safe.

But I wonder if the bigger long-term effect will be on offshore banking centres in general, rather than the eurozone. After all, Cyprus shows that a small financial centre that becomes overwhelmed by financial difficulties cannot stand behind a banking system several times the size of its economy.

These problems arose before in Iceland and the Isle of Man, both popular places to put money. Some British depositors in Kaupthing, Singer & Friedlander (Isle of Man), are still devastated by the loss of their savings in the 2008 financial crisis.

In the case of Cyprus, not only rich Russians but other Europeans with savings of more than €100,000 in Laiki Bank and Bank of Cyprus will be hit. One British expatriate interviewed by the Telegraph summed up the impact:

“If they pull the plug, there will be absolute chaos,” warned Mike Syme, 72, a retired Surrey businessman who has lived in a hilltop villa outside Limassol for the past eight years with his wife Sandy, 69. He counts himself lucky. A few months ago, aware of the Cypriot banking sector’s mounting problems, he transferred 200,000 euros of his savings out of Cyprus altogether . . .

“We’ve dodged a bullet by shifting our money out, and we’re hugely relieved,” Mr Syme added. “But this is a horrendous precedent to set. What will people in Spain, Greece, Ireland and other countries with troubled financial systems do? Already we’re hearing from friends in Spain who are going to put their cash elsewhere.”

The question is: where is “elsewhere”? Many wealthy savers chose offshore banks because they paid high returns, and some avoided domestic tax. They assumed that these centres would keep their money safe.

In future, how many people will trust small islands with their savings? Not as many as before, I would think.

 

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