The onerous terms of a EU bailout for Cyprus will sound the death knell for the island's financial sector and will have a lasting impact on its economy, experts warned on Monday.
As a condition for a desperately-needed 10-billion-euro ($13 billion) bailout, fellow eurozone countries and international creditors Saturday imposed a levy on all deposits in the island's banks.
Deposits of more than 100,000 euros will be hit with a 9.9 percent charge, while under that threshold the levy drops to 6.75 percent, although negotiations were under way on Monday to change the terms in order to soften the blow on small depositors.
"The deal by the eurogroup dealt a very heavy blow to Cyprus -- it was the death knell for the financial sector," economist Simeon Matsi told AFP.
"Banking is about confidence, if there is no confidence there is no banking sector. No one is going to trust Cyprus anymore, whatever happens," he added.
"The eurogroup, International Monetary Fund and the European Central Bank have managed to destroy the reputation of Cyprus."
He also said Russians are preparing to withdraw billions of euros from Cyprus.
"The Russians are already indicating they want to withdraw their money. Why should they stay? They will go somewhere where they can be protected; we can't protect them," Matsi said.
The controversial tax is seen hitting Russian pockets hard, with experts estimating that Russian deposits in Cypriot banks amount to at least 15.4 billion euros ($20 billion) of the estimated 67 billion euros of deposits held by Cyprus banks.
Another economist, Castas Apostolides, said the Cypriot government went unprepared into negotiations with the eurogroup.
"We should have called Europe's bluff," he said.
"A bank haircut on deposits is unacceptable; they should have walked out because without a business sector there is no Cyprus economy," Apostolides said.
An analysis by IHS Global Insight said there was a "potential for contagion from the move to impact bank sectors in other troubled economies on the periphery of the eurozone."
"A mass of withdrawals from eurozone periphery banks could heat up the debt crisis once again after the international financial community had decided that lending to countries such as Spain and Italy would not require the extremely high risk premia it had earlier demanded," it said.
"The financial markets' immediate bad reaction to the part funding of the Cypriot rescue by taxing bank depositors has highlighted the concerns that it could be opening a nasty can of worms."
UBS Investment Bank managing director Reinhard Cluse said the deal "raises the obvious question whether the depositor bail-in in Cyprus is a 'one-off' or whether it will eventually be repeated elsewhere in the future".
"In our view, the immediate implication for other periphery countries might be limited, but we see a substantial risk that depositors will behave a lot more nervously elsewhere in the future," he said.
Jennifer McKeown, a senior economist with Capital Economics, said that eurozone depositors may not be convinced that the Cyprus action will be a one-off measure.
"And even if Cyprus is a special case, the key point is that depositors elsewhere might not be willing to take the chance. ... and if the authorities are unwilling to save an economy as small as Cyprus ... will they really save the others?" she asked.