Depositors will rush to withdraw their money from Lebanese and foreign banks  operating in Cyprus unless the EU abandons its demand to tax all deposits in the island, bankers told The Daily Star Tuesday.
“We realize that the Cypriot parliament  has overwhelmingly rejected on Tuesday the bill to levy taxes on deposits. But this rejection is not sufficient to appease the investors. The damage has already been done. If our branches open tomorrow morning people will queue up to withdraw their money,” a leading banker told The Daily Star minutes after the Cypriot parliament voted against the levy on deposits.
The banker, who spoke on condition of anonymity, revealed that 70 percent of the bank’s clients in Cyprus wanted to withdraw their money in the first two day of the crisis:
“We got lot of messages from our clients in Cyprus that they wanted to withdraw their money. But the branches remained closed at the request of the central bank in Cyprus.”
He added that the Lebanese banks in Cyprus have remained closed for the past few days in anticipation of a panic among depositors.
Another banker said that all banks in Cyprus would remain closed until they got a clear signal that the pressure on Nicosia has eased.
“The Cypriot central bank governor has instructed all banks in the island to remain closed until further notice. He realizes that depositors will take every penny they have from the banks despite all the assurances from the government,” the banker said.
The bankers emphasized that the ball was in the court of the European Union and not the Cypriot parliament.
“The Cypriot MPs can protest as much as they want but at the end of the day the last call belongs to the European Union. Frankly, Cyprus’ problems have just started. The damage has been done and it may be too late to fix it,” another banker explained.
Sources told The Daily Star that the Lebanese banks  would consider their next move in light of the fast developments in Cyprus, adding that most lenders were still deeply worried about the future of Cyprus.
These sources told the paper that the Central Bank and the Banking Control Commission were already conducting a stress test on the liquidity of the Lebanese banks in Cyprus.
The Central Bank  has not yet publically reacted to the proposed taxes on deposits in Cyprus.
On Monday the head of the World Union of Arab Bankers, Joseph Torbey, warned that Arab banks operating in Cyprus might abandon the island if the government did not revoke a proposal to impose taxes on depositors:
“Cyprus is facing a historic challenge that cannot support any mistakes. The Cypriot parliament must reject this miserable plan which will not only lead to the migration of Arab and international deposits, but also deal a blow to Cyprus as an international financial hub.”
But one banker agreed that the impact of the crisis on Lebanon’s financial and banking sector was minimal.
“We are not really exposed to the financial crisis like the Russian investors, who have close to $40 billion of deposits, but nevertheless we will take all kinds of actions to protect our customers,” the banker explained.
Apart from the Lebanese bank branches in Cyprus, some Lebanese investors have deposited their money in Cypriot banks to benefit from the tax-free system and the relatively higher yields on these deposits.
There is no specific information on the amount of cash deposited by the Lebanese citizens in Cypriot banks but most indications show that the size of these deposits are not very substantial.
“We are not very pleased by the European Union  mounting pressure on Cyprus. But even if Nicosia agrees to these taxes, the effect of this move will not devastate Lebanon’s financial system,” another banker said.
Joe Sarrouh, adviser to the chairman of Fransabank, saw an opportunity for Lebanese and Arab banks if the taxes were slapped on the deposits in Cyprus.
“We may be able to attract part of the funds and deposits in Cyprus provided that the prices are not above those offered by European banks. The interest rate on deposits in Europe ranges from 0.25 percent to a maximum of 2 percent,” Sarrough said.
“We should offer similar prices and maybe a little bit more. But definitely we should not offer high yields on these returns. We also have to be selective and choose some of the big players,” he added.
“If we want to attract funds we must make sure that this money is not laundered money,” Sarrouh said.