After Cyprus, Who's Next? Luxembourg? Malta? Slovenia?
March 27, 2013 • 10:41AM

The first use of capital controls by a euro-area member, in the case of Cyprus, may also pose a challenge to countries such as Malta, Luxembourg, and Estonia whose banks also boast large foreign deposits, wrote Jacques Cailloux and Dimitris Drakopoulos, economists at Nomura International Plc., in a report to clients.

"Fearing a fate similar to those who held deposits in Cyprus, these depositors may well decide to reduce their exposure, putting other countries under stress," they warned. Indeed, if, as it is said, Cyprus basically ran into trouble because its banking sector outstripped the entire GDP by a factor of eight, then what about Luxembourg, where the GDP is outstripped by a factor of twenty-four?

The possibility of a Cyprus-like "downsizing" including the seizure of uninsured deposits in countries like Luxembourg, was hinted at by none other than Eurogroup President Jeroen Dijsselbloem, the Dutch Finance Minister, in interviews yesterday. Both Luxembourg and Malta have higher ratios of banking sector balance sheets to GDP than Cyprus. Immediately coming under pressure from some Eurozone governments, as well as by the ECB, Dijsselbloem quickly backed off from his remarks, insisting that Cyprus is a "specific" case.

But Carsten Brzeski, senior economist at ING Group in Brussels, told that "the true test may only come if the rot spreads from Nicosia and starts to infect larger economies." Italy and Spain are struggling, and in Slovenia, where bad loans equal a fifth of economic output, lawmakers are scrambling "to avoid becoming the sixth country needing a bailout," he said.

Charles Goodhart, London School of Economics professor emeritus, told, "[T]hey will swear black and blue that Cyprus is a unique case, but so was Greece. You can talk about the inviolability of insured deposits, but the problem now is, would anyone believe you?"