CYPRUS – The looming bailout of Cyprus is likely to hit local pension funds hard, as Schroders warned that the conditions imposed by the European Commission would make a "mockery" of existing deposit protection schemes.

The country's pension funds traditionally deposit large amounts of scheme assets with the local banks, which would see a cash injection under the terms of the proposed €16bn package – with around €6bn to come from a tax of deposits.

According to statistics produced by Aon Hewitt Cyprus in late 2011, local pension funds had around 60% of assets in local financial institutions, an issue already of concern to the consultancy in the wake of the problems in neighbouring Greece.

Anastasia Anastassiades, senior consultant at the Cyprus office, said the reliance on deposits had not declined since 2011.

However, she stressed that the 60% figure for deposit holdings – which she said would have risen since Aon Hewitt conducted its survey two years ago – did not exclusively cover cash holdings.

"Within that 65%, about 15% of that is loans to members," she told IPE. "You can get a loan from your provident or pension fund. Now, the actual cash deposits in Cyprus are likely about 50%."

According to statistics by the Central Bank of Cyprus, insurance companies and pension funds held €4.3bn of member cash in deposits at the end of January.

The figure was down from a five-year high of €4.5bn in July 2012, but noticeably up from the €2.1bn recorded by the central bank at the end of 2006.  

The €280m Hotel Employees Pension Fund esimated last October that around €2bn of the country's local pension assets were in in bank deposits.

Reaction to the proposal that depositors would be taxed on their holdings will cause concern in Greece, Ireland, Portugal, Spain and Italy (GIPSI), with GK Research saying it could signal "a whole new phase" of the euro-zone crisis.

"Similarly in Europe, the prioritising of bank bond holders over deposit-holders could be a colossal mistake in that it risks triggering a massive reduction in the GIPSI banks' liquidity as capital flees out of deposits," the company said, noting that funds could be diverted to other countries, safer bonds or equity, or simply kept out of financial institutions altogether.

Azad Zangana, European economist at Schroders, warned that the terms of the bailout – whereby deposits that would otherwise be fully protected under the terms of a EU deposit scheme – would make a "mockery" of the system.

"Despite EU officials stating that Cyprus is a special case, the move sets a dangerous precedent for future bailouts of member states with problem banks," Zangana said, adding that it would only serve to increase distrust of banks.

"However," he added, "the bigger danger for international investors is the potential spread of fears to other countries, particularly Spain, which is yet to complete its banking bailout."

Topics