Cyprus Bailout Is a 'Gift' to US Banks, Dick Bove Says

Tuesday, 26 Mar 2013 11:31 AM

By Michael Kling

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There's at least one winner in the Cyprus bailout, says bank analyst Dick Bove: U.S. banks.

Under terms of the 10-billion-euro ($13 billion) bailout that prevented Cyprus from defaulting, uninsured depositors will be largely wiped out. Senior bond holders will take heavy losses, and the country's second-largest bank will be wound down.

"It's a gift to the American banks because you've converted Europe into Latin America," Bove, an analyst with Rafferty Capital, told CNBC. During frequent Latin American banking crises in the past, capital fled to the U.S.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

Bove predicted "a slow seepage of funds out of Europe to the American banks."

"It's already happening and it's going to accelerate," he said. "People are going to try to get their money out of Europe and get it into the United States."

The economies of Cyprus and other European countries will suffer as bank deposits fall, since banks use those deposits to make loans which help drive economies. Taking money from people who support the banks is a mistake because the banks support the economy.

"You have to protect depositors in a bank, and protect the bondholders who lend money to a bank because if you don't do that, then the depositors will take their money out and the bondholders won't make money available," he said.

The veteran analyst predicts European banks will have more writedowns and will need to raise capital. "I wouldn't want to own them," he told CNBC.

"If you have 26 percent unemployment as you do in Spain, what company is going to repay their debts?"

Economists believe the Cyprus bailout may make bank runs and bond sell-offs more likely in the eurozone. Bank depositors and investors will fear they'll sustain heavy loses if another country, such as Slovenia, Italy or Spain, needs a bailout. As soon as a country applies for a rescue, nervous depositors may flee, sparking a bank run.

"We now have a new type of rule and everyone within the euro zone has to sit down and see what that implies for their own finances,” Nobel laureate Christopher Pissarides, an adviser to the Cypriot government, told Bloomberg Television.

The Cyprus rescue may set a precedent. It is the first time a bailout entailed loses for bank depositors and senior bond holders.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

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