Tags: Cyprus | bailout | bank | Gayed

Pension Partners’ Gayed: Cyprus Bailout Risks Bank Runs Elsewhere in Eurozone

Wednesday, 27 Mar 2013 12:26 PM

By Dan Weil and David Nelson

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The bailout of Cyprus, which involves forcing losses on some bank depositors there, creates a danger of bank runs in other weak European economies, such as Spain and Italy, says Michael Gayed, chief investment strategist at Pension Partners.

Cyprus’ size doesn’t merit it a place on the world stage, he notes. “It’s a rounding error in terms of overall eurozone [gross domestic product],” Gayed tells the Financial Braintrust Alliance in an exclusive interview. The key point is precedent, he says.

“The issue here is you’re bailing out Cyprus by taking money from the depositors, which is sacrosanct to a country’s citizens. You’re taking their money directly from those areas which are perceived to be very safe,” he explains.

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Editor's Note: A full, unedited version of this interview is available exclusively to Financial Braintrust Alliance subscribers. Visit www.fbtalliance.com for more information and to sign up.

“The problem is if the EU leaders have decided this is a good way to go about bailing out a country, then maybe you can have a similar situation in Spain, maybe you could have a similar situation in Italy, whereby depositors get some of their money taken to bail out the banks.”

So depositors in banks of countries with weak economies have incentive to move their money to banks of countries with strong economies, like Germany.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

Bank runs are a risk, Gayed says. “That was the initial reaction following the [bailout] statement — European banks got slammed,” especially those in Spain and Italy, he says.

“The thinking was that if [Cyprus] was a template, then those areas which are still problematic in Europe would become even more of a concern because it could spark a bank run.”

European Central Bank President Mario Draghi’s July 2012 promise to do “whatever it takes” to buttress the euro has changed to “whatever can be taken,” Gayed notes.

The ECB didn’t actually have to take any action last year to back up Draghi’s promise.

“All they did was talk up markets by saying, we’re not going to let the euro collapse, we’ll do whatever it takes to prevent a real crisis from metastasizing to the end-of-the-world scenario,” Gayed adds.

“Now if ‘whatever it takes’ becomes ‘whatever can be taken’ by taking money out of depositors directly to bail out banks, you’ve questioned entirely the credibility of Draghi.”

With the bailout of Cyprus, Draghi has created a risk for other eurozone countries. “Once you have an idea out there, it’s out there, and it does become at the margin a risk for a lot of other countries. … This could be a much bigger problem than the markets are aware of right now.”

Many have said that a currency union can’t survive without a political union.

“That’s the huge question that everyone is faced with. The problem is that now you’ve embedded through escalation of commitment so much into the eurozone project that it’s very hard to step away from it,” Gayed maintains.

“It’s one of those things that will just be a tremendous drag on overall economic growth in the eurozone.”

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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