Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

Cyprus Bank Run, Who's Next?

Stock-Markets / Credit Crisis 2013 Mar 16, 2013 - 11:48 AM GMT

By: Raul_I_Meijer

Stock-Markets

Overnight last night, the Eurogroup (Eurozone executive committee) negotiated a deal for a bailout of the banking system in Cyprus. As part of the deal, a one-time, one-off levy on depositors was agreed: deposits below €100,000 are subject to a 6.75% levy, while those over €100,000 are subject to a 9.99% "fine".

While none of the timing is surprising - late Friday, early Saturday is always the ideal time to push such measures down people's throats -, neither did it come as a surprise that a bank run ensued as soon as those few Cypriot banks that do business on Saturday mornings, opened their doors.


This had been foreseen, of course. And so capital controls had been set up beforehand. In this case, limited deposit withdrawals and a full suspension of internet banking. The justification for all this can be found in the large amounts of Russian - allegedly black market - deposits in Cyprus. But while that may be presented as justification, it's by no means not where the potential fall-out will halt.

After all, what's to say that what can be done to depositors in Cyprus' banks, cannot just as easily be repeated for Greek, Italian, Spanish ones? If the EU wasn't yet scared enough of Beppe Grillo and his still surging popularity, now would be a good time to start being afraid. While everyone's focus is on the Russian mob, nobody (just read the press reports today) talks about the law-abiding Cypriots who see their hard earned savings wealth forcibly taken from them. Nobody but the likes of Grillo, that is. Who said earlier this week that (northern) Europe would drop Italy like a stone once German, French and Dutch banks have shed their risky Italian assets.

Besides, if you think the Russian deposit holders are fatally wounded right now, think again. They've seen this coming for at least 6 months, they've had all the time they need to move assets around, and, if anything, will simply use this decision to launder a lot of capital, and happily pay a 10% fee for the honor.

Cyprus is small, and the hope is that hardly anyone will notice what happens there, or be interested. But throughout the Eurozone over the past five years, deposit guarantees have risen, in a so far pretty successful attempt to prevent bank runs. Overnight, that model has now been thrown out with the bathwater. And all of Europe should be wary of what happened. A precedent has been set, and what's good for the goose fits the gander.

Not that German, French, Dutch depositors will lose sleep right this moment, but then that's precisely the idea. The EU core nations have so far been able to convince their citizens that they are rich and their economies recovering, and everything's under control. Moreover, the story that Russian criminals get a 10% haircut goes down well among the respectable citizenry. What happens if and when Italy or Spain need a bailout like Cyprus is not even considered. But maybe that's not so smart.

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 are all still deteriorating, though admittedly there are a few choice German numbers that are not all bad. But there can be no doubt that pressure on the EU/Eurogroup to step in again in some country will arise some time soon. Will that country's depositors leave their money in the bank when that threat becomes real, or will they take it out? What would you do now the Cyprus example is in place?

It's true that Cyprus banks are bloated with assets at 800% of GDP. That's about the same as Ireland, and everyone agrees that "something must be done". Iceland once stood at 1000%, but it's an order of magnitude smaller even than Cyprus, and not a Eurozone member, just like Malta, which presently stands at 1000%.

The picture may change for other Europeans, however, when they realize that overall EU bank assets in 2012 were 366% of GDP, at €47.3 trillion ($61.5 trillion). And if those numbers look too abstract, here's a comparison: in 2011, US bank assets were at 74% of GDP (€8.6 trillion), and Japan's 178% (€7.1 trillion). How about that for perspective?

Among individual member nations, bank assets vs GDP differ. France and The Netherlands clock well over 400%, Germany, Spain and Portugal over 300%, while Italy is well below 300%. That almost makes the latter look like a cautious nation, until you look at issues like government debt.

Overall, these numbers draw an excellent picture of why it's so hard to agree on a banking union. Actually, it's merely a part of the picture, but it still speaks loud enough. That banking union will, guaranteed, even if it is at some point established, never include the UK. There, bank assets are quite a stretch over 500% of GDP, and there are estimates that put that number much higher still. There is no doubt that Britain has a hugely bloated financial sector, i.e. The City, and it has no other policies in place than to protect it, let it grow even further and increase its economic dependency on the financial sector.

With total EU bank assets at €47.3 trillion, private sector deposits at €10.2 trillion (equal to total UK bank assets) and total deposits at €17 trillion, there's a substantial gap (or several), comprised to a considerable extent of risk-carrying assets. This risk, when combined with overall plunging economic prospects, leaves Europe with a poisonous financial mix. And as much as those involved can try to smooth-talk it all over, you can bet your donkey 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 Saturday, March 16 2013.

And they don't even yet have to know that Europe's shadow banking system adds another €17 trillion to the risk picture. They have been sufficiently warned: Brussels has laid out its true intentions on the table. Like a big red flag. In Europe, the much touted government deposit insurance itself has now become a risky asset.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2013 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Raul Ilargi Meijer Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014