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Economy

Bank run fears keep eurozone on edge

As banks in Cyprus prepare to reopen, experts say financial institutions need to regain depositors' trust. They insist events in Cyprus won't be repeated in other euro countries.

Depositors in Cyprus have lost faith in banks. Although Cypriot officials said all banks in the country would open on Thursday, fears of a bank run - when bank customers withdraw their saving en masse - continue to plague the country.

"A bank run is a question of trust," Thomas Schuster of the Cologne Institute for Economic Research told DW. "If everyone believes their money is not safe then it becomes a self-fulfilling prophecy. Trust needs to be established."

Trust is the key

But until this trust can be re-established, authorities in Cyprus will take other measures in an attempt to protect financial institutions - and their employees.

Men sit outside a bank that has been closed for two weeks on March 26, 2013 in Nicosia, Cyprus.
Photo by Milos Bicanski/Getty Images

Controls will be placed on how much Cypriots will be able to take from their savings each day

Cypriots can count on limits remaining in place on how much they are allowed to withdraw from their accounts. When banks open on Thursday the daily limit will be 300 euros. A key factor will be ensuring that businesses have enough access to money to pay their employees at the end of the month.

Dangerous levy

Experts blame discussions about a levy on deposits under 100,000 euros for Cypriots' loss in trust in the banking system. Although those with savings less than 100,000 euros will no longer be required to contribute to Cyprus' rescue effort, it was bad enough that this was even raised as a realistic possibility.

"From the very beginning, the tax on deposits was a non-starter," he said, adding that money is the world's most mobile product. "If someone taxes or wants to tax money then it goes somewhere else right away."

The bill for rescuing banks will be paid first by the banks' own funds, then shareholders will be held responsible and only if their money is insufficient will the state be forced to contribute.

In order to increase its income the government will place higher taxes on industries that cannot easily move away, Schuster said. He said he supported raising income, capital gains, property and value added taxes rather than a levy on deposits.

Hard times ahead

Cypriot banks prepare for customers

Regardless of how the state comes up with the necessary funds, hard times loom ahead for Cyprus.

"We are going to suffer from a serious recession for the next two or three years," George Michael, managing director of IMH, Cyprus' leading business publisher, told German daily "Die Welt."

Estimates suggest consumption will fall by 10 to 20 percent in 2013 and the country's gross domestic product will likely decrease by 20 percent.

"The die has been cast Cyprus for some time now," Martin Hellmich, of the Frankfurt School of Finance and Management, told DW. Measured in absolute terms, Cyprus is too small to endanger the entire eurozone's financial system.

"It is much more important to make clear that Cyprus is a unique case that will not repeat in Italy or Spain," Hellmich said. "That's the deciding factor."

Depositors in Germany are also concerned about events in Cyprus. Some 54 percent of Germans do not believe Chancellor Angela Merkel's statement that savings in Germany are safe, according to a Forsa survey.

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