Two days ago, on Saturday, March 16, 2013, the people of Cyprus were told by the grand poobahs of the erozone that as much as 10% of the deposits in their personal bank accounts would be “levied” confiscated, in exchange for a $13 billion bail-out of their heavily indebted country.
Cyprus is a small island country in the Eastern Mediterranean Sea to the east of Greece, and a member of the European Union (EU). The eurozone is an economic and monetary union of 17 EU member states that have adopted the euro (€) as their common currency and sole legal tender.
Here’s the fallout from that stunning news:
- Reuters reports that the government of Cyprus declared that the bank “holiday” (closure) that began yesterday will continue through today (Monday) and tomorrow (Tuesday), pending a decision by the country’s parliament to approve the levy. The real reason for the bank closures is, of course, to prevent a bank run.
- The euro tumbled to a more than three-month low against the U.S. dollar on Monday.
- In the U.S., stocks closed in the red Monday, with the S&P 500 moving further away from its all-time high, amid worries over the bailout news in Cyprus and over fears the euro zone’s bigger troubled economies such as Spain and Italy may follow suit.
- President of Eurogroup and Dutch finance minister Jeroen Dijsselbloem says in an official statement: “I reiterate that the stability levy on deposits is a one-off measure. [...] The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below €100,000. The Cypriot authorities will introduce more progressivity in the one-off levy compared to what was agreed on 16 March, provided that it continues yielding the targeted reduction of the financing envelope and, hence, not impact the overall amount of financial assistance up to €10bn.” (Translated into plain English, what Dijsselbloem means is that in the end, those with larger bank accounts will have a larger percentage of their deposits confiscated, as long as the Cypriot government contains their bailout request to no more than €10bn instead of the originally sought €17bn.)
Here are some expert analyses and opinions:
Financial Times‘ Wolfgang Münchau writes:
“On Saturday morning, the finance ministers of the eurozone may well have started a bank run.
With the agreement on a depositor haircut for Cyprus – in all but name – the eurozone has effectively defaulted on a deposit insurance guarantee for bank deposits. That guarantee was given in 2008 after the collapse of Lehman Brothers. It consisted of a series of nationally co-ordinated guarantees. They wanted to make the political point that all savings are safe. [...]
The Germans rejected a loan which they were certain Cyprus would invariably default on. So the sum was cut to €10bn. A depositor haircut was the only way to co-finance this. When they did the maths, they found the big deposits would not have sufficed.
So they opted for a wealth tax with hardly any progression. There is not even an exemption for people with only very small savings.
If one wanted to feed the political mood of insurrection in southern Europe, this was the way to do it. The long-term political damage of this agreement is going to be huge. In the short term, the danger consists of a generalised bank run, not just in Cyprus. [...]
Unless there is a last-minute reprieve for small savers, most Cypriot savers would act rationally if they withdrew the rest of their money simply to protect them from further haircuts or taxes. It would be equally rational for savers elsewhere in southern Europe to join them. The experience of Cyprus tells them that the solvency of a deposit insurance scheme is only as good as that of the state. In view of Italy’s public sector debt ratio, or the combined public and private sector indebtedness of Spain and Portugal, there is no way that these governments can insure all banks’ deposits on their own.
The Cyprus rescue has shown that the creditor nations will insist from now that any bank rescue must be co-funded by depositors.
The really puzzling thing is why did people not withdraw their money before? Did they not read the newspapers? Maybe they trusted the new president of Cyprus, who had promised them that he would never accept this? [...]
There are some institutional impediments against bank runs within the eurozone. Some countries impose daily withdrawal limits, ostensibly as a measure against money laundering. [...] But I would not take too much comfort from those impediments. Once fear reaches a critical mass, people will act, and then a bank run becomes a self-perpetuating process.”
Analysts at J P Morgan: Financial markets have underestimated the risks posed by Cyprus. Investors could be wrong to think that the current deadlock over the bailout will be resolved, or that the eurozone’s long-term “crisis management framework” remains intact. Cyprus’s fundamental problem is that it is “politically impossible to impose the extent of losses on insured depositors [those with less than €100,000 in the bank] that the weekend agreement envisaged”. This leaves Cyprus with three options, none very pleasant:
- Option A: Recalibrate the pain so that insured depositors do not need to pay anything, while uninsured depositors pay around 15.4% of their deposits.
- Option B: Go straight to requesting additional support from the Troika of lenders — the European Commission, the IMF and the European Central Bank.
- Option C: Tweak the current pain distribution so that less of the burden falls on those with insured bank deposits, e.g., 3% levy on deposits of less than €100,000; 10% levy on deposits of less than €500,000; 15% on deposits of over €500,000.
Phoenix Capital Research: “Confiscated… as in stolen. To fund a bailout that Cyprus citizens have no interest in funding. In exchange, they, like the Spanish, will receive shares in the garbage banks that were bailed out.
Why does this matter? Cyprus is a tiny country of only 1.1 million people right?
This matters because it indicates what we’ve been saying since June 2012, the entire European “fix” was one enormous lie. NOTHING was fixed in Europe at all. On top of this, your SAVINGS in Europe can be seized at any time if things get bad.
Reread that last sentence… people in Europe just woke up and found that the IMF without their consent, can SEIZE their savings during a bailout.
What do you think will be the end result of this?
BANK RUNS and systemic failure.
The deep dark secret of the entire European Mess is that the minute a real legitimate bank run begins, it’s game over. Spain got a taste of this last year when a bank-run brought the country to its knees in less than six months.
Now that Cyprus has revealed that deposits are not safe in Europe, you better buckle up because the bank-runs are coming. And when they do, the European Crisis will hit overdrive. Once deposits flee, banks have to sell assets to meet the capital flight. When banks have to sell assets to meet deposit flight, they need capital.
And European banks don’t have any extra capital. They’re leveraged at 26 to 1 and would need to raise over €1 trillion AT LEAST.“
The failure of European banks, in turn, will most decidedly affect the United States. More on this tomorrow.
Update: Activist Post says riots are now being reported in Cyprus.
~Eowyn
