Perdido 03

Perdido 03

Sunday, March 17, 2013

The Precedent Is Set - Now Come The Consequences (UPDATED - 5:28 PM)

Doesn't matter if the Cypriot House of Representatives votes for the "bail-in" or not - the precedent that your money will be stolen to prop up the system has been set:

Stelios Platis, the managing director of MAP, a Cyprus-based financial services firm and a former economic adviser to Mr. Anastasiades, said the effect would be the same “whether the Parliament approves the measure or not.” 

“As soon as banks in Cyprus reopen, people will rush to take all their money out, because they don’t believe this is a one-off deal,” he said. “When a bank run happens, the E.C.B. will have to pump in liquidity,” he added, “and what you will have is a shell of a banking system supported by E.C.B.-eligible Cyprus bonds, which will rocket the debt of Cyprus out of control.” 


In Nicosia, the lines at cash machines Saturday disappeared temporarily, mainly because A.T.M.’s had been drained. But on Sunday, at a main branch of Laiki Bank, employees were seen inside the darkened building hovering over computers and filling machines with cash. 

As word got out, groups of people arrived in a steady stream to withdraw money. Many expressed anxiety over what they said were dictates from Brussels and Berlin that would have implications far beyond Cyprus’s shores. 

“They are trying to make an experiment with a small country,” said Stefan Kourbelis, a manager at the Centrum Hotel in Nicosia’s main square, echoing a widely held view. “If it works, the next one could be Spain, Italy and others. If things go badly, they can just say, ‘Who cares about Cyprus?”’ he said.

The next few days in the Eurozone ought to be a blast.

They'll be lucky if they don't set off bank runs in Italy, Spain and Portugal with this "deal."

And once the bank runs start there, don't assume the Best and Brightest will be able to contain it to the weakened Eurozone economies:

On Thursday, Société Générale analysts made a prescient call on Europe.

"It is far too early to dismiss euro area crisis as a key [market] driver," wrote SocGen's Vincent Chaigneau. "We fear another shockwave in the spring."

As it turns out, they may not have had to wait very long. News this weekend that the ECB, EU, and IMF bailout of the Cypriot banking system will include an instant 10 percent "tax" on bank deposits before banks re-open following Monday's holiday has already triggered runs on ATMs there.

Now, the banks have a problem on their hands. "The Cypriot cabinet has declared Tuesday a bank holiday, for fear of capital flight, and this may even be stretched to Wednesday, as depositors are certain to withdraw huge sums from the Cypriot banks after the haircut imposed," reports Greek newspaper Kathimerini.

Many market observers are expressing concerns that the decision could have a ripple effect throughout Europe come Monday when markets open. After all, if European leaders have decided to violate the unspoken rule of bank bailouts – that deposits are sacrosanct – what's to say it can't happen in a bigger eurozone country, like Spain?

In a Sunday morning note to clients, Morgan Stanley economist Joachim Fels wrote, "I view this as a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future."

"This will probably go down as an ill-thought-out rescue plan with consequences for peripheral Europe," says Galy. "It breaks a cardinal rule — namely, public trust on which money relies."
The decision, therefore, has everyone scratching their heads. Why would European leaders play with that public trust in bank deposits?

The SocGen report last week predicting a new eurozone "shockwave" this spring summed it up concisely: "Germany, now six months into a general election, will not be keen to share further risks and tolerate policy slippage."

In other words, German politicians are up for re-election in September, and bailouts of other countries with German taxpayer funds don't help their cause much. So, Cyprus had to be made to share in the burden somehow — hence the haircut on deposits.

"Conditionality is here to stay!" wrote SocGen economist Michala Marcussen in a reaction to the deal. "Indeed, there appears to be no change in the economic policy model of austerity and structural reform that has characterised the euro crisis to date."

The Italian elections demonstrated that voters fed up with that austerity could ultimately break the confidence instilled in European markets since ECB President Mario Draghi gave his famous "whatever it takes to save the euro" speech in July.

The Cyprus deal may finally be a good illustration of the risks markets face from the influence German voters as well — the ones ostensibly coming at the austerity debate from the exact opposite perspective.

"It could be the trigger that our colleagues were expecting," says SocGen strategist Sebastien Galy.

Want to bet that a shockwave set off in Europe doesn't land heavily on these shores too?

UPDATE: Reuters reports the following:

(Reuters) - Cyprus was working on a last-minute proposal to soften the impact on smaller savers of a bank deposit levy after a parliamentary vote on the measure central to a bailout was postponed until Monday, a source said.

In a radical departure from previous aid packages, euro zone finance ministers want Cyprus savers to forfeit a portion of their deposits in return for a 10 billion euro ($13 billion) bailout for the island, which has been financially crippled by its exposure to neighboring Greece.

The decision, announced on Saturday morning, stunned Cypriots and caused a run on cashpoints, most of which were depleted within hours. Electronic transfers were stopped.

The originally proposed levies on deposits are 9.9 percent for those exceeding 100,000 euros and 6.7 percent on anything below that.

The Cypriot government was on Sunday discussing with lenders the possibility of changing the levy to 3.0 percent for deposits below 100,000 euros, and to 12.5 percent for above that sum, a source close to the consultations told Reuters on condition of anonymity.

The move to take a percentage of deposits, which could raise almost 6 billion euros, must be ratified by parliament, where no party has a majority. If it fails to do so, President Nicos Anastasiades has warned, Cyprus's two largest banks will collapse.

Regardless of how they change the levy parameters, the precedent is set.

Maybe it's 3% instead of 6.75%.

But maybe next time it's 10%.

Or 25%.

Or 50%.

Or 100%.


  1. Curious to see if any of the banking class lands in a Cypurs prison. We all know Barack OGoldman and his sidekick Eric Holder won't let that happen on their watch. Maybe someone else somewhere else will see it differently.

    1. It seems the only bank robbers who go to jail are the ones with guns.

      Jamie Dimon has stolen a lot more than any bank robber, and yet there he is, out on the street.