Cyprus Banks Closed Until Thursday

Because everything is under control, you see:

BERLIN — European fears of renewed economic crisis flared Monday as officials took the unprecedented step of targeting bank deposits in Cyprus to pay part of the price tag of a bailout for the troubled island nation.

The proposal to tax all bank deposits, which must be approved by Cyprus’s parliament, sparked a bank run on the tiny nation and raised questions about whether a precedent was being set that could expose other European deposits in future bailouts. Amid turmoil in the country and uncertain parliamentary support, Cypriot leaders delayed a vote on the proposal until Tuesday and shuttered banks until Thursday to avoid further deposit losses. Finance officials from the 17-nation euro zone were scheduled to confer by telephone Monday to discuss the situation.

The Guardian reports the Cypriot government will not hold the bailout vote tomorrow, as there are not enough votes right now to pass it:

The Greek TV station Antenna is reporting that Cyprus president Nicos Anastasiades was planing to tell the Eurogroup tonight that he doesn't have enough support to get the bailout deal approved by parliament.

That won't come as a shock to anyone - especially with his own coalition partner, DIKO, demanding changes (see 7.17pm).

Eurozone finance ministers were due to start holding a videoconference call to discuss Cyprus an hour ago. No news flashes yet....

The videoconference call among Eurozone ministers is now over. Here are the headlines:

Eurogroup gives Cyprus 'leeway' over savings tax

Breaking: Eurozone finance ministers have ended their video conference call on the Cyprus crisis.
And the big news is that the Eurogroup have apparently agreed to give Cyprus more flexibility on its bank levy. As long as it hits the €5.8bn target. And it appears that tomorrow's vote in parliament still goes ahead.
That's according to a source in the Greek finance minister, interviewed by Reuters.
Here are the latest snaps off the Reuters terminal:
• EUROGROUP MEETING ON CYPRUS OVER, EUROGROUP GIVES CYPRUS MORE FLEXIBILITY ON BANK LEVY - GREEK FINMIN SOURCE
• EUROGROUP TO SAY THAT CYPRUS SHOULD SAFEGUARD PROTECTION OF DEPOSITORS BELOW 100,000 EUROS - GREEK FINMIN SOURCE
• CYPRUS PARLIAMENTARY VOTE ON BANK LEVY TO TAKE PLACE ON TUESDAY, AS PLANNED - GREEK FIN MIN SOURCE
• CYPRUS SHOULD STILL RAISE 5.8 BILLION EUROS FROM THE BANK LEVY AS PLANNED - GREEK FINANCE MINISTRY SOURCE

And The Guardian posted a note from JP Morgan Chase analysts on the meaning of all of this:

JP Morgan: material risks from Cyprus

Analysts at JP Morgan have just published a new research note, warning that the financial markets have underestimated the risks posed by Cyprus.
They suggest that investors could be wrong to think the current deadlock over the bailout will be resolved, or that the eurozone's long-term "crisis management framework" remains intact.
With Cyprus, the rest of the eurozone, and Moscow all at odds over the plan, the near-term risks are 'material', JP Morgan warned.
Cyprus's fundamental problem, the bank says, 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 could be to recalibrate the pain so that insured depositors do not need to pay anything, while uninsured depositors pay around 15.4% of their deposits.

The difficulty (and the main reason why this approach was not tried initially) is that the burden would fall disproportionately on
Russian institutions and individuals. Russian influence is Cyprus is considerable; and statements from President Putin indicate that he would be extremely hostile to such an approach. There is some possibility that Russia would respond to a larger haircut by refusing to roll its existing €2.5bn loan to Cyprus; meaning that this option would still leave a significant shortfall. In such a scenario, either the haircut on uninsured deposits would need to be around 21.8%, or further Troika funding would need to be found.

Option B could be to go straight to requesting additional support from the Troika.

The Eurogroup is holding a further conference call this evening, which is likely to investigate the near-term implications of the Cypriot agreement. In our view, a significant amendment of the terms of the deals (which calls for €5.8bn to be found from deposit haircuts) is unlikely.
Politically, it could be very difficult for Germany in particular to make any kind of U-turn (especially since part of the purpose of the whole exercise has been to demonstrate the Government's hard-line to domestic voters). The Eurogroup could propose looking at different parts of the capital structure, but this could risk compounding the existing error by creating additional uncertainties. Finance Ministers may look for other
forms of funding, but their task looks difficult (it is possible that Cyprus will revisit the idea of securitising future gas revenues, which we were surprised was not utilised in the initial proposal).

Option C could be to tweak the current pain distribution so that less of the burden falls on the insureds.

The Government has already proposed staggering the burden so that depositors with less than ?100,000 pay 3%,those with less than €500,000 pay 10% and those with more than €500,000 pay 15%. To our mind, this looks like shifting deckchairs.

And in the long term... JP Morgan argues that the "breach of faith between Euro area policymakers and regional depositors" will remain.

They're trying their best to undo the damage the initial agreement did.

Even if they're able to do that (and that's still a big if), having already let the "bail in" cat out of the bag and tried to stick mom and pop depositors with some of the bank bail out bill will not be forgotten for a long, long time.

You can bet the next time some banks in Spain, Italy, Portugal or France need bailing out, people will run to the exits with all the cash they can get out of those banks no matter what the ECB, EC and IMF says to try and reassure them.

That's what JP Morgan Chase means when they say the "breach of faith between Euro area policymakers and regional depositors" will remain long term.

Eurozone Crisis Test Case

Neil Irwin at Wonkblog on the events in Cyprus:

In a lot of ways, it is separate from the rest of the euro zone, and not just geographically. Its population is a mere 1.1 million (the Greek population is 10 times as large). It has an unwieldy banking system with liabilities equal to eight times its economic output, versus 3.5 times for the euro zone as a whole. Many of those deposits are held by wealthy Russians who use Cyprus as a convenient place to park money.

Those are the reasons the IMF has insisted on losses for depositors — those, and the fact that rescuing Cyprus’s finances without the 5.8 billion-euro contribution represented by depositors’ losses would have meant a bailout approximately equivalent to the country’s annual economic output, too much for the fund to stomach.

“The challenges we were facing in Cyprus were of an exceptional nature,” said Jeroen Dijsselbloem, the Dutch finance minister who helped engineer the plan, according to the Financial Times. “Therefore, unique measures were determined to be necessary.”

The European Central Bank will now be on high alert, monitoring activity in Greece, Spain and beyond for evidence that the Cyprus precedent will result in new runs on those nations’ banks. Expect a flood of central bank liquidity into those nations if there is any hint that depositors across Europe seem to be thinking that Cyprus is the new normal and that their seemingly safe bank deposits could be reduced 10 percent without warning.

The best the rest of the world can hope for is that Cyprus’s case is sufficiently unique that it won’t spark panic in Athens and Madrid (or in Lisbon, Dublin and Rome).

For the past six months, the global financial markets have become increasingly complacent, convinced that the euro-zone crisis is, for practical purposes, over. Cyprus is the test of whether that is correct, or whether the complacency was instead misplaced.

In other words, if there is going to be a new wave of crisis in Europe, historians will be able to trace its starting point back to today’s Cyprus bank bailout.

And Tero Kuittinen at Forbes:

Europeans are trying to come to grips with the shocking decision of Cyprus to abruptly declare a stiff levy on bank deposits, even those under 100’000 euros. Everyone is now waiting for Monday morning and how depositors in Southern Europe will react to the sudden realization that 7-10% of their savings could be abruptly confiscated on any given weekend. Photos of Cypriots lining up in front of ATM’s that no longer work will be splashed across the Sunday editions of European newspapers.

The sheer weirdness of the Cyprus move means that European leaders must deliver two conflicting messages simultaneously. First, they must argue that the sudden bank account levy was absolutely necessary right now. Second, they must convince Europeans that it will never, ever be repeated.

The President of Cyprus has already delivered a dramatic statement. According to it, not confiscating some of bank deposits would have meant that the banking system of Cyprus would have collapsed immediately. That’s it. The only two options right now were allowing the banking system collapse or implementing the 6.75 – 9.90% shock levy on savings accounts. Needless to say, very few people in Europe had any idea that Cyprus is facing these two drastic options in March 2013.

Yet on the very same day, the European Union Economic and Monetary Commissioner Olli Rehn stated that there won’t be a repeat of the tax on bank deposits that was imposed as a part of Cyprus’s aid program. He bluntly claimed that “there is no concrete case where it should be considered.”

How can both statements be credible? How can regular EU citizens with savings accounts in the Mediterranean banks possibly gauge the risk level accurately? The messaging challenge here is profound. By the time the Spanish and Portuguese banks open on Monday morning, Europeans must believe that A) The Cyprus crisis was so acute and dreadful that the unprecedented savings tax was the only possible alternative and B) Another similar situation will never materialize, so there is no reason to pull money out of southern banks.

The Club Med economies simply cannot handle another crisis of confidence. During the calm month of January, Spanish retail sales plunged by -10% and the December sales collapse was recently revised to -11%. Multinational companies from McDonald’s to Tiffany have started warning about weakening European trends. Apple‘s Christmas quarter weakness stemmed partly from a pronounced European revenue growth slow-down over the past three quarters. Qualcomm recently downgraded the North American 3G/4G device volume growth to under 2% in 2012; the consumer electronics industry can hardly absorb a new European consumer sentiment crisis without a significant hit to global growth trends.

How is EU going to thread this needle? The next 48 hours are going to be pivotal. By making its move on Saturday, EU has given Europeans time to fret and mull over the Cyprus shock for most of the weekend. There will be no shortage of bank line pics on Twitter come Monday morning.

Monday and Tuesday are going to be very interesting days to watch the markets.

Just as a reminder, the bank runs and bank failures during the Depression came a couple of years after the market crash.