British analyst: Cyprus crisis to have global consequences

Business Materials 18 March 2013 18:12 (UTC +04:00)

Azerbaijan, Baku, March 18 / Trend A. Badalova /

A further escalation of the crisis in Cyprus may have global implications, Julian Jessop, Chief Global Economist at the British economic research and consulting company Capital Economics believes.

"It could influence the course of fiscal policy in the UK and monetary policy in the US, sap appetite for the "Abe trade" in Japan, and revive safe haven demand for gold," Jessop said in a report obtained by Trend on Monday.

Moreover, according to Jessop, the return of fears that one or more countries may actually leave the euro-zone altogether could lead to a sustained correction in the prices of riskier assets in general.

In a radical departure from previous aid packages, euro zone finance ministers want Cyprus savers to forfeit a portion of their deposits in return for a 10 billion euro ($13 billion) bailout for the island, Reuters reported. The decision, announced on Saturday morning, stunned Cypriots and caused a run on cash points, most of which were depleted within hours. Electronic transfers were stopped.

The originally proposed levies on deposits are 9.9 percent for those exceeding 100,000 euros and 6.7 percent on anything below that.

A source close to the consultations told Reuters that the Cypriot government on Sunday discussed with lenders the possibility of changing the levy to 3.0 percent for deposits below 100,000 euros, and to 12.5 percent for above that sum.

According to Jessop, the plan to impose losses on Cypriot bank depositors has potentially serious implications for financial stability in the euro-zone as a whole.

"The economy of Cyprus is tiny (the country's GDP is just $22 billion, or 0.2 percent of the euro-zone total) but far-reaching financial crises often have small beginnings and wars have been started over less," Jessop said in a report.

He also belives that it is not unreasonable to assume that some of any outflows from European banks would find their way into gold in one form or another.

However, according to the analyst, it is still possible that the bailout deal will be modified, perhaps under pressure from the IMF (Internationa Monetary Fund) and that the fall-out can be contained to Cyprus.

"However, this would require a wary and skeptical public to believe that what has been proposed in one small part of the region is a special case that does not set a precedent for levies on bank deposits elsewhere," the analyst said.