Pawel Morski: Cyprus: RealPolitik and Other Lessons
Pawel Morski:
Cyprus: A Brutal Lesson in RealPolitik | Some of it was true...: So it turns out that those who noted that the Cyprus bailout took place ahead of a local bank holiday on Monday were onto something. The terms of the bailout deal represent a huge leap in how the EU is tackling the crisis. Time will tell whether this leap is over or into the chasm…. Deposits below EUR100,000 to suffer 6.75% tax; above 100,000, 9.9%….
Cypriot finance minister Michalis Sarris said his government had already moved to ensure deposit holders could not make large withdrawals electronically before Tuesday’s open; Jörg Asmussen, a member of the European Central Bank executive board, said a portion of deposits equivalent to the levies would likely be frozen immediately.
What does this all mean?…. Four choices have been faced ahead of every bailout; screw the local taxpayer; screw the creditors; the Germans pay for everything; or fiddle the numbers in the hope the crisis just goes away. The Irish programme rested heavily on option 1, the Portuguese and Greek (especially) on options 1 & 4. Hopes for option 3 (ESM buys shares in the banks) are dead in the water. This programme indicates option 2 gaining in strength, 3 & 4 sinking. Taxing local small depositors. This is really shocking, being both the least fair and the riskiest part of this plan. The fairness aspects are obvious, but the risk that other Peripheral depositors will reconsider is clear, albeit so far more popular with the usual suspects than with locals…. The hedge funds win again. A favourite trade for speculators has been Cypriot government debt. And it’s done very nicely. Mayfair sends its thanks. Update: This implies that you’re better off with your money in peripheral government debt than in a bank. That’s a message I personally would be very hesitant to send.
And the Russians? The reason small depositors have been hit is that the losses inflicted would be much bigger if a) only large deposits b) only non-EU deposits were haircut. The data on Cyprus deposits is here (MUMs = Monetary Union Members). I would guess the thinking is that 10% is seen as a cost of doing business when it comes to money laundering, but 30% would probably finish Cypriot banking for good. If the infliction of losses on small depositors has a purpose, it’s probably to reassure the Russians that they are not being discriminated against…
And:
Cyprus: What Were They Thinking? and some other notes | Some of it was true...: [I]f you can sell euros at Friday’s close you probably should (you can’t – pre-pre-market at 6pm London or 7am Auckland is about a percent off) but the tone is one of wariness rather than panic. The absence of Street research interest probably tells a bigger story than what they actually say. Only Barclays bothered with the Sunday conference call, but we’ll probably get more chances to dial in and be told that the research houses don’t really know what’s going on. We can also enjoy the spectacle of people who right now couldn’t name him interpret the importance of the intervention of Archbishop Chrysostomos. Not for the first time, Twitter was ahead of expensive analysts in concern about deposit haircuts….
The Cypriot parliamentary vote has been postponed and a Bank Holiday announced for Tuesday (following the usual one tomorrow). Basically inconceivable that the levy will be revoked, but there may be some noise around finally getting it through. A la TARP or EU referendum, the question will be asked until an acceptable answer is received.
The central mystery boils down to “WHAT THE HELL WERE THEY THINKING?”. Haircutting Taxing small depositors doesn’t only violate the principle of social equity, it hurts a lot of people and creates political and logistical difficulties without playing a central part in raising the cash…. [P]oor people have very little cash…. [M]y own best guess is that this increases the risk of wider European bank runs from vanishing to miniscule. That risk is all the bigger because more depositors are drawn into the net. But Cyprus clearly is different, with bank assets 8x GDP and foriegn deposits of dubious origins alone over 100% of GDP. At 0.2% of the Eurozone economy it can get a “take it or leave it” ultimatum. Spain or Italy won’t….
It’s going to be an interesting week. I think it’s unlikely to be a traumatic one, but I’d feel more comfortable if there weren’t quite so many journalists gagging for a bank run.
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