The government of Cyprus has rejected an EU plan to take £5.8 billion out of savers’ accounts to pay for a bail-out of the banks. Here, Ruth Lythe and Dan Hyde explain everything you need to know.
What’s going on?
The government in Cyprus had been told to take €5.8bn (£4.9bn) directly from savers’ bank accounts if it wanted a €10bn (£8.6bn) bailout.
This would have hit the country’s 1.1 million inhabitants, and up to 60,000 British expats who have Cypriot bank accounts.
Last night, this plan was rejected by the Cypriot Parliament.
It would have meant those with between €20,000 (£17,200) and €100,000 (£86,000) would have had to hand over 6.75 per cent of their cash. Anyone with more than €100,000 would pay 9.9 per cent.
Someone with €50,000 worth of (£43,000) life-savings in a Cypriot bank account would have lost €3,375 (£2,902).
To prevent people avoiding the charge by emptying their accounts, the government closed branches and froze internet banking.
So, is the crisis over?
Not by a long shot. There is no bailout under the current deal and the Cyprus economy remains in a perilous state. This may only be a small country, but its fortunes could affect the rest of the EU, and, eventually, our own economy.
The latest options on the table seem to be that either the EU stumps up the cash with no strenuous conditions on ordinary savers, or Cyprus will have to find a way to get itself out of this crisis.
Cyprus has really called the bluff of EU finance ministers. The last thing they want is for a member state to go to the wall. Without a deal, it could plunge Cyprus into a debt spiral and there could be a run on the banks, sending some over the edge.
Whatever happens now, furious Cypriots may still create a run on their banks with many expected to try to withdraw their life savings when branches reopen. A cap on withdrawals may yet be put in place.
And all this turmoil just increases the risk of a debt crisis hitting troubled European neighbours such as Spain, Portugal and Greece. On top of this, the unprecedented savers tax will send jitters across the global economy.
Is money in Bank of Cyprus UK safe?
Bank of Cyprus has offered accounts to UK savers since 1955, and currently has 50,000 customers.
Their cash — around £910 million — is unaffected by the troubles.
Its UK arm is a fully fledged, stand-alone bank, separate to its parent organisation in Cyprus. Money held in Britain stays here and is used to fund loans to small businesses. So even if the Cyprus bailout fails and its banks crash, UK savers will be safe.
If, for another reason, Bank of Cyprus UK fails, the cash is protected under the UK savings safety net.
Are Expats still under threat?
Many of the 60,000 Britons who had moved to the sunshine island were being asked to pay the price of the bailout. Although the current plan has been called off, they are not out of the woods yet.
The only exemption was the 3,000 British troops based in Cyprus, whom the Government had promised would be refunded.
For now, bank accounts in Cyprus are frozen, though they are expected to reopen on Thursday or Friday. Around 12,000 expats who claim a state pension have had their payments to Cypriot bank accounts frozen. It was not known last night when these payments would restart. Expats deprived of vital income can temporarily switch the payment to an account based outside Cyprus. Contact the International Pension Centre. From abroad, call +44 (0)191 218 7777 or visit gov.uk/international- pension-centre.
Will Spain be next?
The planned Cypriot cash-grab has sent shock waves through the eurozone — particularly in countries such as Portugal, Italy, Spain and Greece, which have already received bailouts and whose economies are still fragile.
Experts fear a precedent has been set and savers in other countries, particularly Spain, could have their savings confiscated, too.
There are 750,000 homes in Spain owned by Britons, and many of these have bank accounts holding thousands of euros.
The threat is not so much that it will try to get on top of its debt problems by imposing a Cyprus-style tax on savers, but that worried bank customers will create a bank run — leaving British savers exposed.
Economists point out that bailed-out countries are slowly on the road to recovery — making a move less likely. They have been desperate to calm the nerves of worried savers.
Mouhammed Choukeir, chief investment officer with Kleinwort Benson, says: ‘This sets the stage for something similar to happen again. ‘If Cyprus was to become the first of many, savers would be wise to put their savings into a tightly run banking system.’
The latest developments in Cyprus are uncharted territory for the EU. If you have money overseas, it would pay to keep a close eye on what European finance ministers decide to do next.
. . . and Ireland, Italy and Portugal?
Many of the smaller EU countries still have perilous finances.
Ireland should prove relatively stable as it has already put in place tough austerity measures.
And its UK-based banks are all covered by the British savings safety net.
However, Portugal is a major concern and is struggling, despite a €78bn bailout. But perhaps the biggest worry for the EU is Italy. It has recently held elections where voters effectively rejected their austerity measures. If they cannot decide on a new Government soon, the knock-on effect could spell disaster. EU finance chiefs are unlikely to let such a big nation go to the wall. But its debts could cripple the growth in Europe.
France, by contrast, is struggling, but is thought to be much less at risk of needing a bailout.
Are my UK savings at risk?
Most British banks have no branches in Cyprus. But if the crisis spreads, they could suffer.
For example, Barclays has £23bn of loans and deposits in troubled Spain and a large High Street arm in its flailing neighbour Portugal.
Crucially, savers — even with banks that have European owners, such as Santander — are well-protected in the unlikely event a UK bank crashes. Everyone has £85,000 covered by the Financial Services Compensation Scheme.
However, some institutions share a licence — for example, Halifax does with Bank of Scotland, Saga, BM Savings and AA Savings — and you are covered only once up to £85,000 (£170,000 joint) across all accounts.