Residents rush to pull money from Cyprus banks as EU takes aim at Russian deposits

Published March 18, 2013

| FoxNews.com

Cypriots rushed to pull their money out of banks and ATMs before the tiny Mediterranean nation’s government could finalize a plan to seize depositors’ funds to satisfy euro zone leaders, sparking a run that prompted banks to be closed until at least Thursday.

The island nation’s leaders were huddling to come up with a way to soften the blow on average depositors, with one proposal targeting accounts with deposits above $130,000. The plan elicited an angry response from Russian President Vladimir Putin, whose nation’s oligarchs may have as much as $19 billion secretly deposited in Cyprus banks.

"Putin said that this decision, in case of its adoption, will be unfair, unprofessional and dangerous," Russian news agencies quoted Kremlin spokesman Dmitry Peskov as saying.

The Brussels-based euro zone agreed on Saturday to give Cyprus a $13 billion bailout, but demanded levies that would take between 6.75 and 9.9 percent of bank deposits.

Analysts believe the measure is designed to ensure that the bailout doesn’t go toward propping up Russia's billionaires – including Putin himself.

"It is clear that (Cyprus) is under tremendous pressure from the European Union," Deputy Finance Minister Sergei Shatalov told Interfax.

The $19 billion figure comes from Moody's, and would account for as much as half of all Cypriot deposits. Cyprus’ bank deposits dwarf by 8-to-1 the gross domestic product of the nation of 1 million, indicating a dangerously oversized banking system stuffed with foreign cash. And Cypriot banks are invested heavily in Greek government bonds, which were restructured last year at the EU’s demand, incurring big losses on bondholders.

News of the coming bank accounts seizure sent shockwaves rippling through Europe and beyond. Not only did it spook wealthy foreigners who have long parked money in the island nation’s banks, it was seen as possibly setting the stage for similar grabs in bigger nations within the troubled euro zone.

"If I were a saver, certainly in Spain or maybe Italy, I think I'd be looking askance at these measures and think this could yet happen to me," Peter Dixon, global financial economist at Commerzbank, told Reuters.

The Cypriot Parliament put off a vote on the measure until Tuesday in order to blunt the pain for small savers. But without the EU bailout, Cyprus would be headed for default, according to experts. If depositors – especially the foreigners who have made Cyprus the Cayman Islands of Eastern Europe, pull their money from banks, action by the European Central Bank may be all that can stop regional contagion. The Cypriot central bank announced all banks will remain closed until Thursday while talks on the savings seizure continue.

Russian mining tycoon and owner of the NBA’s Brooklyn Nets Mikhail Prokhorov said euro zone leaders "had set a real financial mine under the idea of a single Europe."

"And this is not because it touches Russian business, which can afford to lose $2 [billion] or $3 billion," Prokhorov told the Kommersant business daily. "The European Union essentially opened a Pandora's box."

Some analysts say the move could send billions in Russian deposits to safer havens, such as Luxembourg, leaving Cyprus no way to pay down its bailout.

"The unhappiest of the Russians will simply look for other places to put their money," Paragone Advisory Group analyst Alexander Zakharov told the Global Post.

White House spokesman Jay Carney declined to comment on the events, but said "a stable and strong Europe" is in the U.S.'s interest and that the President Obama is focused on domestic economic growth, which can help insulate the U.S. from foreign tumult.

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