Tuesday, April 2, 2013

Bank Run in Cyprus; Who’s Next?

Automatic Earth
Last weekend, a Eurozone executive committee negotiated a deal for a bailout of Cyprus’s banking system. As part of the deal, a one-time levy on depositors was agreed upon: deposits below €100,000 are subject to a 6.75% levy, while those over €100,000 are subject to a 9.99% ‘fine.’
Capital controls were set up prior to the announcement: limited withdrawals and suspension of Internet banking. The justification for all this was the large number of Russian deposits in Cyprus. But while that may be used as an excuse, the buck won’t stop there. Similar measures can easily be repeated for Greek, Italian and Spanish banks.
And while everyone's focus is on the Russian mob, nobody talks about the law-abiding Cypriots who have had their hard-earned savings confiscated. The Russians, meanwhile, saw this coming, and have had plenty of time to move assets around. Alternatively, they will use this opportunity to launder a lot of capital, and happily pay a 10% fee for the honor.
Cyprus is small, and the hope is that no one will pay much attention. But throughout the Eurozone, deposit guarantees have risen in an attempt to prevent bank runs. Overnight, that model has been abandoned. All of Europe should be aware that a precedent has been set.
For the moment, EU core nations have citizens convinced that they are rich and their economies recovering, and everything's under control. Moreover, the idea of Russian criminals getting a 10% haircut goes down well among the respectable citizenry. What happens if Italy or Spain needs a bailout is not even considered.
The Cyprus bailout was ostensibly executed to ‘save the Eurozone,’ and it was presented as a one-off. But so was Greece and its forced haircuts for investors. You can only have so many one-offs and remain credible. European economies in general are deteriorating, and no doubt some other country will need a bailout sooner or later. Will that country's depositors leave their money in the bank when the threat becomes real? Would you?
As much as those involved try to gloss over it, you can bet that for the law-abiding hard-working citizens of the next rescue case, the world will be cast in the gloomy light of what happened to Cyprus on March 16, 2013.
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