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Savers in Cyprus desperately tried to get their money out of banks ahead of a EU & IMF bailout that imposed a levy on savings.  A 9.9% levy is being placed on savings over 100,000 EU and a 6.75% levy on lesser amounts. The savings levy will cover much of the cost of the bailout. Senior bondholders, however, will be fully protected. Savers will be given shares of bank ownership in compensation, but if a bank is insolvent, the shares could be worthless. One saver was so angry at the bank's closing ahead of the levy that he threatened it with a bulldozer.

The run on the banks could spread because, as the New York Times reported, European officials refused to rule out his happening elsewhere: (hat tip to DRo in the comments).

The move revived fears of bank runs elsewhere in the euro zone, especially after a top European official declined to rule out similar measures affecting depositors in countries beyond Cyprus.

The Cypriot cabinet has declared Tuesday a bank holiday, for fear of capital flight, and this may even be stretched to Wednesday, as depositors are certain to withdraw huge sums from the Cypriot banks after the haircut imposed.

Nicosia postponed from Sunday to Monday the tabling in Parliament of the bill including the measures for the Cypriot bailout – including a bank account haircut and a tax hike on interest and corporate earnings – but the European Central Bank insists on a rapid voting because there are already signs a domino effect will follow across European lenders and markets from Monday.

In classic British understatement, the BBC explained how this levy on savings is a dangerous gamble. Up to this point, the EU had insured bank savings at full value.

Lenders are said to be gambling that the risk of a bigger banking crisis elsewhere in the eurozone has receded. While Cyprus may be one of the eurozone's tiniest economies - its third-smallest - there could be serious repercussions for other financially over-stretched economies, such as those of Spain and Italy, BBC Business editor Robert Peston writes.

The point of the levy is to warn lenders to banks that they should take care where they place their funds, and avoid banks that overstretch themselves - as Cypriot banks did, he adds.

The banks in Cyprus failed because they took huge losses when the EU bailed out Greece, not because of anything done by Cypriots. (The U.S., however, played a role in the bankruptcy.) Banks in Cyprus have taken large deposits from Russia, but alleged Russian money laundering activities have nothing to do with the bank failures. Moreover, all savers are being levied, not just very large accounts. Small savers panicked.
The prospect of savings being so savagely docked sparked terror among the island's resident British community. At the Anglican Church's weekly Saturday thrift shop gathering in Nicosia, Cyprus's war-divided capital, ex-pats expressed alarm with many saying that they had also rushed to ATMs to withdraw money from their accounts. "There's a run on banks. A lot of us are really panicking. The big fear is that there soon won't be cash in ATMs," said Arlene Skillett, a resident in Nicosia. "People are worried that they're automatically going to lose ten present [of their savings] in deposit accounts. Anastasiades won elections saying he wouldn't allow this to happen."

She said a lot of elderly Britons had transferred savings to the island when they had decided to retire there. "Nobody can understand how they can do this – isn't it illegal? How can they just dock money from your account?" she asked.

In the coastal town of Larnaca, Cypriots described how they had queued from the early hours in the hope of withdrawing deposits from banks. "A lot of us just can't believe it," said Alexandra Christofi, a divorcee in her 40s who said she had rushed to her bank before doors even opened at 6am. "I had put my money there for a rainy day. It's absolutely all I have and I cannot understand how Cyprus is being singled out. Other EU countries got bailouts and we're only in this position because we supported Greece," she said, referring to the massive losses the Cypriot banking system suffered as a result of Greece's restructuring its debt last year. "Where is the fairness in that? Where is the solidarity and support that is meant to be the reason why we are all unified in this common currency in the first place?"

The BBC's business editor, Robert Peston explained that German bankers demanded the levy because they refused to bail out Russian "hot money".
UPDATE 14:20: A well-placed official rings to tell me why investors should not be panicking that the punishment of Cypriot depositors is a precedent, or that lenders to Spanish and Italian banks will be spanked as well before too long.

He says the structure of the Cypriot bailout has been determined by German politics. (Aren't all eurozone bailouts fixed in that way?)

Here is the logic behind imposing a hefty levy on Cyprus deposits, according to this official:

1) Regulators and politicians are convinced that a vast amount of cash in Cypriot banks belongs to Russian money launderers.

2) Few German politicians of any persuasion would have voted for a Cyprus rescue that simultaneously rescued these launderers.

3) So the only way to get the bailout through the Bundestag is for the launderers to be taxed to the tune of almost 10% of their allegedly ill-gotten cash. And if innocent savers are hurt too, that is the way this particular "Keks" will crumble.

However, savers in southern Europe, where banks are in shaky condition, may see the precedent this sets and ignore the reassurances that their money is fully insured. Once the EU fails to insure deposits in one EU nation, why should bank depositors in other nations be confident that their savings are fully insured?

Robert Peston explained the amazing logic behind the decision to levy savings.

The levy serves as a caution to lenders to banks that they should take care where they place their funds and avoid banks which overstretch themselves - as Cypriot banks did.
The corollary lesson to European savers is:

I am amazed that the Germans are willing to risk bank runs in Spain and Italy over the relatively tiny losses that would have been incurred by fully backing the banks in Cyprus. And if the Germans were really concerned about the moral hazards of bailing out wealthy Russian crooks, why did they put the levy on savings under a million Euros?

This gamble could take the Eurozone down.

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