The bailout package sealed on Monday may have soothed fears to some extent, but there remain concerns that the implications of events in Cyprus could yet hit other countries in Europe.
The proposed levy on Cypriot bank deposits, later rejected, has undermined confidence in the safety of bank deposits, while for investors there are lingering worries over the implications for equities and bonds.
So should you be worried about events in Cyprus and elsewhere in Europe? Here we look at some of the key questions raised by the latest bank crisis.
What’s the current state of play in Cyprus?
Banks reopened on Thursday after being closed for two weeks during talks over an EU bailout. The intervention was triggered when the country’s banks ran into trouble after being affected by sovereign debt restructuring in Greece.
The Cypriot stock exchange has also been closed for two weeks and will not reopen until at least Tuesday. The coming week will tell us much about the risk of contagion following the bailout.
Are events in Cyprus likely to affect banks in other European countries?
That may yet happen, although consensus seems to be that the circumstances in Cyprus are sufficiently unique – with Russian deposits accounting for around a third of the money held in Cypriot banks – to allay fears of a snowball effect.
However, the capital controls imposed on Cypriot deposits will have an impact on consumer confidence that could prove costly if further crises unfold.
“As it stands, any bank in a periphery nation with even a whiff of a problem is likely to see a drain on deposits as savers look for a safer haven,” said Simon Lloyd, chief investment officer at Murray Asset Management.
I’m concerned about the money I’ve got in the bank. Is it safe?
Up to £85,000 in savings and investments is covered by the Financial Services Compensation Scheme (FSCS), doubling to £170,000 for joint accounts. The scheme was strengthened in the wake of the 2007 run on Northern Rock and is in line with the Europe-wide limit of 100,000 euros.
There are pitfalls to be aware of, however.
The main one is that deposits are typically protected per institution, rather than brand, with the system based on regulatory licences. Royal Bank of Scotland and NatWest have separate licences, so deposits of up to £85,000 in each are protected. However, other brands are all covered by the licence of the umbrella institution. For example, Bank of Scotland, Halifax, AA, Saga and Intelligent Finance are all under the Bank of Scotland licence.
Visit www.fsa.gov.uk/consumerinformation/compensation/brands for a full list of shared licences.
Patrick Connolly of IFA AWD Chase de Vere, said: “If nothing else, the problems in Cyprus should be a stark reminder to UK savers that they should stick with UK regulated accounts and also keep within the £85,000 FSCS limit with each individual product provider.”
Didn’t Cyprus set a precedent for raiding customer deposits?
By tapping into deposits – those with more than €100,000 deposited will have their savings taxed in exchange for bank shares – the Cyprus package has undermined confidence in the security of the money held in Europe’s banks.
It’s the first time a eurozone country has imposed restrictions on capital held in banks. Lloyd said: “Until now, governments had stepped in to secure excess deposits, but safety is now only as good as the deposit guarantee of €100,000.”
Any suggestion that the first €100,000 could be at risk would require the EU to tear up the guarantee that gives a saver reason to support the banking system.
“That would create the very real risk of a ‘run on the bank’ – or at worst, all the EEA banks,” said Lloyd. “If one country had been mandated to go back on its promise, why should any other in the same jurisdiction be relied upon?”
In the UK it would still be highly unlikely that a retail depositor would stand to be wiped out in the event of one or more banks getting into difficulty, believes Haig Bathgate, chief investment officer at Turcan Connell.
“If they did this it would trigger a significant run on the banks, which would be counter-intuitive and unwind the significant efforts that have been undertaken since the credit crisis to stabilise the banks.”
Are there some savings provider I should steer clear of?
To stay on the safe side you should ensure any savings products you take are provided by firms that are covered by the FSCS. Some overseas providers are, including Bank of Cyprus, which has offered some of the most competitive savings rates around in recent years. Icesave wasn’t covered by the FSCS when it collapsed in 2008, leaving thousands of UK savers relying anxiously on Iceland’s deposit guarantee scheme to get their cash back.
Some of the most eye-catching savings rates are offered by relatively unknown banks that are not authorised by the UK City regulator.
Savers should therefore be wary of high yielding deposits from less little-known banks, said Bathgate.
“Those who pay the highest rate of interest by implication need the deposits most. Be realistic about the yield that can be achieved when interest rates are as low as they currently are,” he said. “That applies also to bonds, which we believe are in a bubble and should mostly be avoided.”
Will it impact on my investments or pension savings?
Investment advisers now believe it’s unlikely that the Cyprus crisis will have any significant adverse affect on UK investors.
“Cyprus accounts for less than 0.2 per cent of eurozone GDP and the debt is not nearly as significant or widely held as was the case with Greece,” Bathgate pointed out.
But any suggestion that banks in other countries could need bailouts could have a negative impact on European equities, Connolly warned.
“This would affect many people’s individual savings account (Isa) and pension investments,” he said. “However, if these latest issues are confined to Cyprus then hopefully any related negative sentiment should be short-lived.”
There is some evidence that the events in Cyprus have slowed the recent surge of money into equities, said Lloyd.
He added: “As far as UK investors are concerned, the important signals are the step back from breaching the bank guarantee and at the same time, the renewed concerns about the weakness of the euro, which is steadily giving up the ground it had started to make against the pound this year.”
Should I take my money out of funds with European holdings?
If you’ve got a large chunk of your money in Europe-focused funds you should consider spreading it more widely anyway, in the interests of diversification. If you do want to reduce your exposure to Europe it’s worth bearing in mind the US dollar’s current status as a safe haven, said Brian Dennehy, of Fundexpert.co.uk.
“Buy US dollars. Stick them under the mattress if you have to,” he said. “More conventionally you can buy funds such as Threadneedle Dollar Bond or M&G Global Macro Bond, both designed to benefit from dollar strength.”