Bank Run in Cyprus

A bank run has begun in Cyprus. This is important because Cyprus is a member of the eurozone. Cyprus is tiny; but if it goes down and scraps the euro, it could well be the beginning of the end. The issue is a decision by the Eurogroup to make a Cyprus bailout contingent on all depositors absorbing some losses. This is from today's Liz Alderman and Landon Thomas Jr. story, "Turmoil in Cyprus Over a Bailout Rattles Europe":

By size, Cyprus’s economy represents not even half a percent of the combined output of the 17 euro zone countries. Yet the impact of this weekend’s decision by European leaders to impose across-the-board losses on bank depositors — from the richest Russian oligarchs, who have increasingly deposited their money in Cyprus’s banks, to the poorest Cypriot pensioners — in return for 10 billion euros, or $13 billion, in bailout money could not be more far-reaching. 

After five years of bailouts financed largely by European taxpayers, wealthy European nations have decreed that when a bank or country goes broke, bond investors and perhaps even bank depositors will pay a significant portion of the bill.

This is how naked capitalism describes the situation today:

The cheery view that Europe had moves past its crisis now looks to have been a tad premature. The astonishing weekend revelation that Cyprus had struck a deal for a Eurozone rescue of the island nations banks that hinged on a deposit grab, um, tax, of 6.75% of deposits below €100,000 and 9.9% for those above €100,000, sends a message that anyone in a weak bank in a periphery country, particularly a large deposit holder, is at risk. The one thing that America learned in the Great Depression is that to prevent debilitating bank runs, depositors need to be sure their holdings are safe. And if you need to extend government guarantees to provide that reassurance, then government bloody well better keep the banks on a short leash to make sure you dont have to pay out on those guarantees all that often. The recklessness of letting financiers talk governments out of constraining bank activities is coming home to roost. 

But currently there aren't the votes in Cyprus' Parliament to accept the bailout terms. So Cypriot banks are closed until Friday and this morning markets are all down. The lengthy, detailed naked capitalism analysis concludes by saying that unless treated German schizophrenia -- wanting to maintain its huge trade surpluses without funding its eurozone partners -- will destroy the financial system:

Over the weekend, colleagues who are normally of the calm, cool and collected sort have been stunned by this development, although the Eurocrats had been muttering about a deposit haircut in Cyprus in recent months. And the message could not be clearer: you are at risk if you hold money in a shaky bank or country in the Eurozone. One reader’s reaction: “I thought I’d put a prediction on the record: starting tomorrow, the euro payment system really starts to unravel.” 

After the PR barrage that accompanied the launch of the OMT, which was a brilliant exercise in smoke and mirrors (all it did was repackage and rebrand existing ECB powers), the quiet deposit run out of periphery countries to banks in the core nations slowed and had even reversed in recent months. Expect it to pick up with renewed vigor. Even if we don’t see hot bank runs of people lined up trying to empty their accounts, anyone who has more than €100,000 on deposit in a periphery country, particularly Spain, has to recognize he is in danger. However, many of the people own businesses (a payroll of meaningful size means you’ll have large deposits at least when you are about to pay staff, and unless you manage cash very aggressively, much of the rest of the time too) will need some time to switch to safer (presumably German or maybe even Swiss) banks, since selecting a new bank and moving a large, multi-serivces account is a big undertaking. And this sort of hidden-to-the-public big deposit run has felled banks; it was the proximate cause of the resolution of WaMu. 

Now the EU officials could easily calm nervous depositors by announcing an ECB-backstopped deposit guarantee, instead of the current national system which depends on not-exactly-credible central banks. Germany and its fellow surplus countries have hesitated about proceeding with the necessary steps to further economic integration (notice how the plan to implement eurozone wide bank supervision, which Germany insisted was a precondition to Eurozone-level deposit guarantees, has languished?). Germany is trying to maintain policies that are contradictory: it wants to continue to have large trade surpluses, yet not fund its trade partners; its wants debtors to meet their obligations, yet refuses to allow either enough in the way of fiscal deficits or monetary easing to keep debtor countries from falling into deflationary spirals, which assure default. Germany’s failure to relent on any of these conditions means that what breaks will be the financial system.

Negotiations are underway no doubt to rejigger the tax formula for Cypriot depositors, reducing it for small fry. But, barring some authoritative pronouncement from Mario Draghi of the ECB that guarantees deposits at eurozone banks, the damage is done. Is this the beginning of the end for the euro?