The Cyprus ordeal has reawakened fears of the euro's stability and the process for coming up with much-needed cash for another struggling nation in the south of Europe. Rising doubts follow Cyprus's decision to reject a bailout proposal that would require it to pay 40% of bailout costs by using cash deposits from the country's banks in lieu of mining riskier investment asset classes.
In Spain common and preferred shareholders have lost most of their investments. The difference between Spain and Cyprus is that 72 billion euros of deposits in the island nation represent 400% of GDP and 95% of its banking system's deposits. Very little weight is placed on high-risk products like derivatives and stocks. Spain only holds 800 billion euros (86% of its GDP) in cash deposits. This lower pressure on the economy does not lessen fears that Spain has the most deposits of all EU nations. Banks felt this fear yesterday, as did the risk premium and Spanish stock market. Analysts think that a contagion is inevitable. There is no comparison between the capabilities of Spain and Cyprus economically.
Cyprus has offered interest rates upward of 10% on cash deposits and low taxation in order to act as a discrete tax haven. The alternative to taxing these savings deposit accounts is to increase taxation elsewhere, because the country is experiencing solvency issues thanks to investments in Greek debt. In order to stay afloat, Cyprus citizens have to come up with 5.8 billion euros. But it is not clear where this money will come from. European Union member nations are requiring Cyprus to put up this amount before it agrees to cover the remaining 60% of bailout costs. All factors considered, it makes sense that savers are scared and capital is fleeing the country. But these fears could dissipate if the E.C.B. delivers on its commitment and ensures that Cyprus gets the cash it needs.
