European crisis

Cyprus bailout plan hurts Spanish financial markets

Risk premium widens and stocks fall on fears sparked by tax on bank deposits

Spain’s financial markets suffered on Monday after the European Union and the IMF over the weekend drew up a rescue plan for Cyprus that proposes that bank depositors foot part of the bill for the bailout of the Mediterranean country’s banking sector.

In opening trades, the yield on the Spanish benchmark 10-year government bond moved back above five percent, pushing the spread with the German equivalent up by 24 basis points to 371, while the blue-chip Ibex 35 opened down 2.9 percent. Italy’s risk premium also suffered from fears of similar measures being imposed in other euro-zone countries.

By 2.30pm, the situation had calmed down somewhat, with the risk premium up 12 basis points at 350, while the Ibex 35 was down 2.34 percent at 8,417.10 points.

Under the terms of the loan to save the Cypriot banking sector, deposits of up to 100,000 euros would be subject to a tax of 6.7 percent, while amounts above that sum would carry a levy of 9.9 percent. The Cypriot government on Monday postponed a vote on the rescue plan as moves were underfoot to seek to ease the terms. There were reports that the Cypriot government is looking to reduce the levy for deposits of under 100,000 euros to two percent.

Spanish government officials on Monday continued to insist that the situation in Cyprus was not comparable to that in Spain. “The banking system in Spain has been subject to a rigorous clean-up,” Agriculture Minister Miguel Arias Cañete said on Monday. “Our banks are now in a magnificent situation, and I don´t believe they will suffer contagion because the situation is not the same in Spain.”

Although Monday was declared a bank holiday in Cyprus, Economy Minister Luis de Guindos insisted that this did not compare with the so-called corralito, restrictions on deposit withdrawals imposed by the Argentinean government during the 2001 crisis in the Latin American country. “This is not a corralito as only the taxes will be withheld,” Bloomberg quoted De Guindos as saying. “Deposits will not be frozen; people will be able to move their money freely.”

ECB management board member Jörg Asmussen also sought to reassure depositors in other euro-zone countries arguing that the situation in Cyprus was unique. Cypriot banks have been accused of helping Russians to launder money, while the banking system on the island is disproportionately bigger than the size of the local economy. Asmussen said it was up to the Cypriot government to decide on the bank deposit tax, but insisted the administration needed to raise 5.8 billion euros under the terms of the bailout.

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