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Sunday, March 17, 2013

Impact of the Cyprus Bailout Deal


Under the bail-out plan, depositors with more than 100,000 euros would have 10% of their deposits taken to assist in stabilizing the banks; depositors with less than 100,000 euros would also have to "contribute," albeit at a lower rate of 6.75%. (Source).

The latter article, an op-ed from Roger Kimball, further notes:
As Business Insider reports, this so-called “stability levy” is expected to raise €5.8 billion. It is also expected to raise a “flood of concerns” — that’s bureaucratese for “panic” — about a run on banks elsewhere in the eurozone, where (as the report delicately puts it) “fragile public finances are also under scrutiny.”
Right. So that €100,000 it took you years to save is, come Monday, worth €90,000. And how about the following Tuesday, when it will turn out Cypriot banks need more dough? What then? Jörg Asmussen, a member of the Executive Board of the European Central Bank, explained it thus: “In order to have burden-sharing, you extend the tax base. To residents and also to non-residents.” Spoken like a true socialist (or Social Democrat, which is the same thing). Politicians and bankers mess up, you pay. Private property? Ha, ha, ha. [Update: my friend Janet Daley writes: "It's worth noting that this EU confiscation of private savings is using the same excuse (catching money-launderers and foreign currency smugglers) that the US uses to justify FATCA [Foreign Account Tax Compliance Act]. The civil liberties and property rights of law-abiding people can be trampled over in the name of pursuing ‘criminals.’”]
So what do you suppose happened in Cyprus? Yes, Virginia, people rushed to the closest ATM and tried to get their money out. Alas, many machines are already refusing to honor withdrawal requests. (Deposits, though, are happily accepted.)
The Daily Beast also opines that a bank run is inevitable:
As you probably already know by now, the banking system of Cyprus has imploded, and Europe has stepped in to provide, not a "bail-out", but a "bail-in": the banks get a capital infusion, but the depositors have to take a haircut, losing between 7-10% of the value of their bank account. That's not exactly what they're calling it, of course; it's a "special bank levy" of 6.75% on accounts up to 100,000 (the limit for deposit insurance) and about 10% on accounts above that limit.

The depositor haircuts seem to have been necessary to get political support for the deal in the EU--and political support in the EU was necessary because Cypriot banks had assets somewhere in the neighborhood of 8 times the Gross Domestic Product of Cyprus. And just to bring it full circle, the banking system had grown to such grotesque, hypertrophied proportions because Cypriot bank accounts seem to be a favorite of tax-dodging Russian oligarchs . . . which is why it was politically necessary to give depositors such a large haircut.
... The decision to place a levy on insured accounts, in particular, seems extremely foolish. Note that it may have been necessary to prevent a run on the foreign accounts, which by some reports constitute about a third of total deposits. But if violating the deposit guarantees was necessary to implement your "tax the Russians to pay for the bank bailout plan", that should have been a sign that the plan was a bad idea.
...  It's bad enough to slam middle-class savers in order to put a smaller levy on Russian oligarchs, but it's insane to do so when you're actually making it less likely that your bank bail-in will succeed. And at this point, the whole scheme is looking extremely shaky.

It's foolish for Europe, too. If Cyprus had done this on its own, the country would be in trouble, but the rest of the world would just emit a bemused sigh and move on. Now, however, this plan has the imprimatur of the EU stamped on it--and so people are going to be looking hard at other European banking systems. Which other nations' depositors might have to take a similar haircut in the future?
Meanwhile, the Telegraph reports that people have been stopped from accessing their savings accounts, and that the prohibition will likely continue for several days. It also notes that this will impact depositors' confidence throughout the EU:
But it was the precedent that may have been set by the terms of the bail-out that was causing concern among international investors who were previously hopeful that European economies were finally recovering.
There were fears that savers in other nations in economic difficulty may start withdrawing bank deposits, a move that could have disastrous consequences. Financial figures from across the world warned of the dangers.
The levy is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future,” wrote Joachim Fels, the chief economist at Morgan Stanley in London, in a note to clients.
Lars Seier Christensen, the chief executive of Denmark’s Saxo Bank, wrote: “If you can do this once, you can do it again.”
Mohamed El-Erian, the chief executive of Pimco, the world’s largest bond investor, said: “In Europe, it [the Cyprus bail-out] could well undermine the recent tranquil behaviour of depositors and creditors in other vulnerable European economies – in particular Greece, Italy, Portugal and Spain.
“Despite assurances from European officials that Cyprus is 'exceptional’ and the measures are 'unique’, this weekend’s actions have increased the risk premium.”
Barclays said in a report that the deposit levy was an “ominous” sign of how bail-outs were being handled.
Undoubtedly, what we will see is that large depositors will be moving their money out (probably some already did so based on what a "little bird" told them), and it will be the small depositors that will lose their money.

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