Cyprus bailout raises fears of tapping savings accounts in other troubled countries

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The prospect of losing money in a bank savings account was once considered unthinkable, but the possibility sent Americans into a panic in the 2008 financial crisis, and the threat recently surfaced anew.

This time the focus is on European banks and the attempted financial rescue of Cyprus. To help deal with the island nation's failing banks, the European plan adopted this week will hit up individuals and companies with money in Cyprus banks for part of the $13 billion rescue. Those with bank deposits over 100,000 euro, or nearly $130,000, could be forced to give up as much as 40 percent once the plan is implemented.

Last week, a more chilling plan surfaced. Instead of only tapping large uninsured accounts over 100,000 euro, the unsettling idea was to also go after money kept in Cyprus banks by small savers, people who fell within the limits that are supposed to be insured against any loss.

Although European authorities ultimately spared the little guy, tapping bank accounts, in general, unnerved observers. Analysts wondered if the Cyprus bailout model could be imposed on accounts in other European institutions as Europe's debt crisis continues and more bailouts are needed. Perhaps people nervous about their bank accounts might yank money out of any country with suspect banks, such as Spain and Italy.

Such an exodus would aggravate the debt problems because fragile banks can't afford to lose deposits. Italian and Spanish bonds and stocks declined this week, especially bank stocks. U.S. banks, on the other hand, are expected to be winners as jittery European companies seek safer outlets outside the continent.

"The Cyprus deal may leave profound scars on the whole euro area," Citigroup economist Giada Giani said. "Risks of deposit flight in other fragile banking sectors have likely increased."

In addition, controls are being established to keep people from emptying their accounts. Analysts have questioned the heavy hand of European leaders in imposing rules, and Cypriots have been protesting in the streets.

With analysts chastising European leaders for leaving savers uncertain about the fate of their money in banks on Europe's periphery, European Central Bank leaders sought to provide assurances Tuesday. In interviews in the European media, they emphasized that Cyprus was unique and was not intended to be a model for funding other European countries in crisis.

But the Cyprus rescue is a fresh reminder that the world's debt problems are far from over, and that European leaders are making up the rules as they respond to financial emergencies. It underscores once again that people cannot become cavalier about risks that can impact their money, whether in bank accounts, bonds or stocks, in this era of excessive debt and unpredictable solutions.

While Europe deals with its emergencies, Citigroup economist Willem Buiter said recession makes it difficult for Greece, Italy, Spain, Portugal and Ireland to grow out of their financial problems.

"We continue to expect some form of eventual restructuring" of government debt and bank debt, he said. He thinks it will play out over several years.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis

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