LONDON: A hit imposed on Cypriot bank depositors by the euro zone has shocked and alarmed politicians and bankers who fear the currency bloc has set a precedent that will unnerve investors and citizens alike.
After all-night Friday talks, euro finance ministers agreed a 10 billion euro ($13 billion) bailout for the stricken Mediterranean island and said since so much of its debt was rooted in its banks, that sector would have to bear a large part of the burden.
In a radical departure from previous aid packages and one that gave rise to incredulity and anger across Cyprus the ministers are forcing the nation's savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.
The European Central Bank's pledge to buy euro zone government bonds in unlimited amounts if needed has calmed the beleaguered currency bloc for the past five months.
But if investors fear the Cypriot template could be repeated in any future rescues, that calm could be shattered.
Without a bailout, Cyprus would default, which could unravel the investor confidence fostered by the ECB.
Politicians, bankers and analysts said the levy could undermine banks in other euro zone countries, even though the ministers insisted it was a one-off and Cyprus represents just 0.2 percent of euro zone economic output.
"The unprecedented move is an extreme measure, and in our view it will spread some panic across the EMU periphery, and we cannot rule out some capital outflows," said Annalisa Piazza at Newedge Strategy.
"In the short run we expect some effects on periphery's (bond yield) spreads and some weakening of the euro cannot be ruled out," Piazza said.
The decision sent Cypriots scurrying to the cash points, most of which were emptied within hours. Most have been unable to access their bank accounts since Saturday morning, a move unlikely to engender calm.
Euro zone policymakers made a point of saying they would monitor any signs of money moving out of Cyprus but did not say how they might react in the event.
"For us, Cyprus is systemically relevant. Despite the small size of the economy, disorderly developments in Cyprus could undermine the important progress made in 2012 in stabilising the euro zone," ECB policymaker Joerg Asmussen said after the Eurogroup meeting concluded before dawn on Saturday.
A Cypriot bank holiday on Monday will limit any immediate reaction. The deposit levy set at 9.9 percent on bank deposits exceeding 100,000 euros and 6.7 percent on anything below that will be imposed on Tuesday, if voted through in parliament.
That is not certain to happen, but fear of the alternative probable default will focus minds.
Cyprus's parliament postponed until Monday an emergency session to discuss the levy, which President Nicos Anastasiades urged lawmakers to support.
Three parties in the 56-member chamber, where no party has an absolute majority, have already said they will not back the plan.
"The government can be reasonably confident of only around 26-28 votes at the most, while the opposition may be confident of around 26," said JPMorgan analyst Alex White. "Our best estimates of a potential vote have it too close to call at this stage."
Beyond Cyprus's borders, there was little sign of public alarm, and banks and state authorities were quick to offer reassurance.
Bank of Cyprus and Laiki Bank put messages on their British websites to assure depositors that the levy does not apply to Cypriot banks overseas.
The Bank of Spain said there were no signs of capital flight from Spain.
"The scope of potential contagion to other peripheral countries in terms of deposit outflows and sovereign debt is considerably more limited than if such a decision would have been taken in previous programmes," analysts at Barclays said in a note.
"We consider the likelihood of a bank run in other periphery countries to be limited, including in Greece."
Ireland's finance ministry said the levy was a one-off measure for Cyprus that had no implications for Irish deposit holders.
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