As Cyprus reneges on their deposit insurance guarantees, the rest of Europe is in the crosshairs.
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.
From a technical, economic, perspective, however, this looks to be disastrous. If we are not yet having full-scale runs on Cypriot banks, we've at least worked up to a pretty brisk jog. No banking system can survive a bank run; if everyone tries to get their money out at once, even the soundest, most prudently managed bank in the world will fail, because they can't liquidate their loan assets fast enough to keep the cash moving out the door.
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.
Deposit insurance is the one way we know to stop a bank run. Oh, the government can say that this was a one-time thing, but once you've broken your promise once, what's to stop you from doing it again? 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?
Hopefully, savers will view Cyprus as an extreme one-off: a tiny nation whose banking system was unsustainably oversized for its economy, and whose substantial depositor base of kleptocratic foreigners made it uniquely difficult to deliver government support.
The problem is, Europe seems to be chock full of unique, one time problems with its banking system. There's a real risk that investors will decide that they'd rather not stick around to see what one-of-a-kind, custom-crafted solution the European ministers come up with next.
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.
From a technical, economic, perspective, however, this looks to be disastrous. If we are not yet having full-scale runs on Cypriot banks, we've at least worked up to a pretty brisk jog. No banking system can survive a bank run; if everyone tries to get their money out at once, even the soundest, most prudently managed bank in the world will fail, because they can't liquidate their loan assets fast enough to keep the cash moving out the door.
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.
Deposit insurance is the one way we know to stop a bank run. Oh, the government can say that this was a one-time thing, but once you've broken your promise once, what's to stop you from doing it again? 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?
Hopefully, savers will view Cyprus as an extreme one-off: a tiny nation whose banking system was unsustainably oversized for its economy, and whose substantial depositor base of kleptocratic foreigners made it uniquely difficult to deliver government support.
The problem is, Europe seems to be chock full of unique, one time problems with its banking system. There's a real risk that investors will decide that they'd rather not stick around to see what one-of-a-kind, custom-crafted solution the European ministers come up with next.
Related Reading:
Fanatics Who Will Do Anything To Save The Euro
Daylight Bank Robbery In Cyprus Will Haunt The EMU
Cyprus Offers A Scary Economics Lesson For America
Willie Suttonomics
The Rape of Cyprus
Cyprus and the Death of Deposit Insurance
The Extraordinary Thing Is That There Hasn't Yet Been A Bank Run Across The Mediterranean
After Cyprus Bank Bailout, Depositors Race To Withdraw Their Cash. Is The Rest Of Europe Next?
Monumental Deceit: How Our Politicians Have Lied And Lied About The True Purpose Of the European Behemoth
The EU's Insidious War On The Nation State Must Be Halted
Václav Klaus Warns That The Destruction Of Europe's Democracy May Be In Its Final Phase
Bubble Times: 20 Facts About The Collapse Of Europe That Everyone Should Know
The UK to the EU: Eeeeeew! Go Away!
Europe's Double Dip Teaches A Lesson About Taxes
A Message To Leftists In The UK & US From Sweden
Suicide-By-Demographics, Post #3,209,598
Leavin' Here: Escape From The E.U.S.S.R.
(European) Union Power!
Über Alles After All
There's No Such Thing As A "Permanent" Tax Cut
Immigration & The Town That Stopped Mincing Words
Hitler's Ghost Haunts Europe
A Lib Dem Gives Voice To Britain's National Sickness
The American People Voted For Big Government. Now, Let Them Pay For It!
Fanatics Who Will Do Anything To Save The Euro
Daylight Bank Robbery In Cyprus Will Haunt The EMU
Cyprus Offers A Scary Economics Lesson For America
Willie Suttonomics
The Rape of Cyprus
Cyprus and the Death of Deposit Insurance
The Extraordinary Thing Is That There Hasn't Yet Been A Bank Run Across The Mediterranean
After Cyprus Bank Bailout, Depositors Race To Withdraw Their Cash. Is The Rest Of Europe Next?
Monumental Deceit: How Our Politicians Have Lied And Lied About The True Purpose Of the European Behemoth
The EU's Insidious War On The Nation State Must Be Halted
Václav Klaus Warns That The Destruction Of Europe's Democracy May Be In Its Final Phase
Bubble Times: 20 Facts About The Collapse Of Europe That Everyone Should Know
The UK to the EU: Eeeeeew! Go Away!
Europe's Double Dip Teaches A Lesson About Taxes
A Message To Leftists In The UK & US From Sweden
Suicide-By-Demographics, Post #3,209,598
Leavin' Here: Escape From The E.U.S.S.R.
(European) Union Power!
Über Alles After All
There's No Such Thing As A "Permanent" Tax Cut
Immigration & The Town That Stopped Mincing Words
Hitler's Ghost Haunts Europe
A Lib Dem Gives Voice To Britain's National Sickness
The American People Voted For Big Government. Now, Let Them Pay For It!
No comments:
Post a Comment