SocGen out with Cyprus note Sunday night:
TOP CLIENT QUESTIONS
WILL CYPRIOT STABILITY LEVY TRIGGER CONTAGION?
In the early hours of Saturday, the Eurogroup agreed an adjustment programme of up to €10bn for Cyprus, the first under the ESM. Eurogroup President Dijsselbloem referred to the “exceptional nature” of the situation that required “unique measures”. In the special case of Cyprus, this is an upfront one-off “stability levy” of 6.75% on all bank deposits of 100K or less and 9.9% for deposits over 100K, with the aim to raise €5.8bn.
MARKET ISSUES: The question raised over the weekend is whether this could trigger concerns for bank depositors in other periphery markets. Much will depend on how local media elsewhere report events in Cyprus, but the fact that deposits below the €100,000 deposit guarantee level are also subject to the level is clearly cause for concern. More broadly, the concern will be that there is still no standard approach of tackling the euro debt crisis. Greek PSI proved a major source of contagion. Although ESM/OMT today means that the euro area has a firewall, the “stability levy” risks delivering anything but what its name suggests.