Cypriot bailout deal reins in oversized financial services sector: is Malta next?

On Tuesday evening, Cyprus approved a last-minute bailout deal that is perceived by analysts to be motivated by France and Germany's primary goal to 'tame' Cyprus's oversized banking sector that was quickly failing.

The deal, which averted imminent financial meltdown, was reached when the economically-ailing EU member state agreed to slash its oversized banking sector and extract a hefty levy from wealth depositors in troubled banks to finance the €10 billion bailout.

Cyprus secured the €10 million bailout agreement with Eurozone finance ministers, the European Central Bank (ECB) and the International Monetary Fund (IMF) after it pledged to wind down the Bank of Cyprus, the island's biggest, and Laiki, the second runner-up.

IMF head Christine Lagarde wanted both banks, representing half of the Cypriot banking sector, closed down.

In the end Laiki is being closed down with its bond and shareholders facing huge losses and €4.2 billion in deposits looking lost.

Bank of Cyprus, on the other hand, will become a shadow of its former self, its deposits frozen pending restructuring and downsizing and wealthy depositors facing losses between 30% to 40%.

"The result that was found is right," German Chancellor Angela Merkel announced following the deal's approval. "It also makes those who helped cause these undesirable developments play their part. That is how it should be."

Germany has long insisted that Cypriot banks, which attracted foreign investors with high interests rates, not only needed to contribute to the bailout, but that the entire Cypriot economic business model was "dysfunctional."

With a banking sector seven times Cypriot gross domestic product, Lagarde had insisted this was unsustainable and that it would be more than halved to around three times GDP by 2018.

In a time of embryonic eurozone bank supervision, with the European Central Bank being made the supervisory authority for all eurozone banks, Germany's and Lagarde's statements were viewed by many as the forerunners of a new policy aimed at taming financial services and bringing oversized banking sectors under tight control.

Malta next in line?

All eyes are now increasingly on Malta and Luxembourg, which like Cyprus have oversized financial services sectors relative to their GDPs.

MaltaToday is informed that the Cypriot crisis is being considered a risk for Malta for two reasons, the first being that it could undermine confidence in banks because of the unprecedented bank levy that was applied to finance the bailout.

The second is that it increases the likelihood that Malta's own financial sector comes under the Commission and the IMF's sights as the next oversized financial sector that needs pruning down.

Malta in particular is viewed as an offshore tax and banking haven just as Cyprus was, and relative to its GDP its financial services sector is bigger still. Should it encounter similar problems in future, fears are that the IMF could enact similar measures to reign in the island-state's financial services sector.

Finance Minister Edward Scicluna sought to address the former by welcoming how the bailout deal did not retain the controversial levy on insured deposits (below €100,000) suggested last week.

Addressing the latter, he also underlined how Eurogroup joint statement "respects the dignity of the Cypriot people by letting their own authorities decide the appropriate administrative measures they deem fit to apply for their exceptional situation of their financial sector."

He also said that the programme will address "the exceptional challenges that Cyprus is facing and restore the viability of the financial sector, with the view of restoring sustainable growth and sound public finances over the coming years."

"Once we are satisfied that the deposit guarantee is respected we should offer all the assistance we can give within the €10 billion limit to contain the mishap which has befallen Cyprus," Scicluna said.

Reports that Cypriot businesses and operators are turning to Malta to relocate their operations, are also adding fuel to the fire - especially in the light of Cyprus's reputation as a haven for Russian deposits tainted by money laundering implications.

Contacted by MaltaToday, the Malta Financial Services authority however denied that it received reports of any significant increase of Cyprus-based companies or operators seeking to relocate to Malta.

Local operators similarly denied to MaltaToday that there is a mass influx of Cypriot businesses or funds currently underway, and insisted that while a number of expressions of interest in relocation have been made, "it is still to early to tell".

"We have received some enquiries over the course of this week as to what Malta may offer but due to the fact that the story is still developing as we speak, there is also a 'wait and see' approach being adopted, at least for the coming days," one financial services sector firm said.

The firm however insisted that while it is "always open for business with reputable clients", it would handle such enquiries "in full respect for our laws and our statutory obligations in terms of KYC requirements and anti money laundering regulations.

"Malta has always prioritized reputable business over quantity and we must of course continue to do so, without any compromises being made in this regard," it insisted.