Cyprus deal spooks markets

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Cypriot small savers breathe a sigh of relief, Russian investors fume and EU finance chiefs fan the flames of fiscal panic. The solution to the Cyprus bank crisis may turn out to be a watershed moment in the history of the EU, and could turn out to have undermined the stability of banks across Europe.

The solution involved closing down one bank, Laiki, and imposing a hefty levy on accounts of more than 100,000 euros in order to fund the bailout. Most Cypriot savers with modest balances were protected. The levy hit major investors, many of them Russian, who faced losss of 40 percent or more of their cash.

One of the most significant repercussions from the crisis occurred after comments by Dutch finance minister Jeroen Dijsselbloem, who suggested that the Cyprus solution could be used as a template for future bailouts. Rather than the EU using its troubleshooting funds, he implied that the account-holders would be responsible. The comments caused immediate turbulence in the markets, with bank share prices plummeting.

It was immediately apparent that Dijsselbloem had blundered badly, and he made some desperate attempts to retract what he had said. "Cyprus specific case," he tweeted. "Tailor-made to situation, no models or templates used." That came too late to stem concern that similar levies could affect account-holders in other vulnerable banks, in Ireland, Greece, Spain, Portugal, Italy and France.

In Cyprus the deal effectively calls a halt to one of the island’s main economic foundations, its role as an investment middle-man for Russian money. The extent to which Russian cash has propped up the Cypriot economy in the last decade is not clear, but it will be difficult, if not impossible, for Cyprus to remain a haven for Russian investment after the EU demands. Russia’s roubles will look for alternative refuges.

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