Expert: New Cyprus aid package can lead to outflow of capital to Turkey

Business Materials 18 March 2013 19:03 (UTC +04:00)

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

A default rescue program for Cyprus , the main provisions of which is to attract bank deposit owners in a force way to finance the anti-crisis program worth 10 billion euro, could lead to an outflow of foreign capital to Turkey, professor at Ankara's Gazi university Soyalp Tamçelik told Trend today.

Cypriot authorities at a meeting of the Eurogroup in Brussels on Saturday morning agreed to the unprecedented conditions of the loan agreement designed to save Cyprus from default. Its main function is to force depositors to finance the anti-crisis program. It envisages introducing a one-time levy of 6.75 percent of the amount up to 100,000 euro and 9.9 percent over this threshold.

According to the expert, after the decision comes into force, the outflow of foreign capital from the Cypriot banks is a natural process and the main destination for foreign capital will be the Turkish Republic of Northern Cyprus. But, taking into account the economic and political situation in Northern Cyprus, the foreign capital will naturally move to Turkey.

"The Turkish economy and the exchange are fairly stable," he said. "This will be important for foreign investors, who will be looking for an alternative to Cyprus."

According to Tamçelik, another attractive market for outflow of foreign capital is Lebanon. Lebanon's banking sector, which is more integrated into the EU than other countries in the region, could be interesting for foreign investors, he said.

"The decision taken by the finance ministers of the EU in order to avoid defaulting in Cyprus will lead to the EU banking sector losing its attractiveness," Tamçelik said.

The European Union has been experiencing a wave of economic crisis in recent years, and in the light of the decision to freeze the accounts proposed in the framework of restructuring the banking sector of Cyprus, foreign investors will lose confidence in European financial markets, he said.

In anticipation of serious consequences, the Cypriot government wants to change the formula provided for by the loan agreement on forced charge-off of depositors' funds from accounts in national banks. The Cypriot government has proposed to reduce the tax rate on deposits of up to 100,000 euros to three per cent and raise them to 12.5 per cent for amounts in excess of 100,000 euros.

According to Goldman Sachs analyst Francesco Garzarelli, banks in Cyprus currently have foreign deposits in the amount of 68 billion euros, of which 26 billion euros account for investors from Russia and the UK.