Over the weekend, the subject of the European crisis came back to the headlines with a vengeance, thanks to a unique, “up-front one-off stability levy” bail-in proposal that should help save Cyprus from bankruptcy by taxing the country’s bank depositors’ savings.
This Cypriot levy should generate about 5.8 billion euros ($7.5 billion), and bank authorities have confirmed that that amount has already been frozen proportionally in all accounts, which includes the so-called “insured” accounts. The levy is a precondition for receiving a 10 billion euros ($12.9 billion) “financial assistance” from the Troika.
It’s interesting to take notice the Eurogroup never used the word “bail-in” in any of its statements and we also know now there was disagreement at the Eurogroup meeting when the Cyprus financial assistance package was decided.
I really would like to know different percentages of frozen assets the Cypriote banks did apply. As banks as well as the Cypriot stock exchange remain closed at least until Thursday, we’ll have to remain patient for trying to know what’s going on behind the numerous facades of illusion on the little island in the Mediterranean Sea.
Already, the Cypriot central banker expects Cyprus to fall short of the 5.8 billion euros in revenues through taxes if the bank levy, as was agreed on over the weekend, is revised.
Fitch Ratings placed the Cypriot banks Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank on rating watch negative. Fitch is eying the fact that significant losses on depositors would constitute a restricted default under its own rating definitions.
During the whole lifespan of the eurozone, we never have seen bank deposits being levied or taxed in order to collect sufficient resources to avoid going over a default cliff by any eurozone member state. I’m afraid the genie is at a point of leaving the bottle, and once that happens, it’s certainly not an overstatement to say what could happen in Cyprus could happen elsewhere in the eurozone.
So far, I can’t detect anything that could assure me similar kinds of levies on depositors would never take place again in the future in any member state of the eurozone. It’s certainly not policymakers that could assure me.
Investors should keep in mind that on Saturday, Jeroen Dijsselbloem, Minister of Finance of the Netherlands and president of the Eurogroup, which is the body that in fact exercises political control over the euro currency and related aspects of the EU's monetary union, declined to rule out taxes on depositors in countries beyond Cyprus. He also added such a measure was not being actively considered for now.
Prudent investors would do well paying attention to the fact that such an alarming statement coming from the Dutch Minister of Finance shouldn’t be taken lightly.
I always try to remain as realistic as possible. Taking into account what we know so far, I would try to avoid as much as I can unpleasant surprises with my deposits, in case they should happen, in “problematic” eurozone sovereign countries.
We all know the countries are all plagued with excessively indebted banks while being very weak themselves. I would prefer becoming more prudent while hoping that in the end it would be proved I was too prudent. Like it or not, we must accept a taboo is on its way to be broken in Cyprus. Of course, every investor should make his or her own decisions about how much risk can be taken on and if a higher level of prudency is justified or not.
By the way, investors should not get confused by what happened in Denmark in 2010 when the Amagerbanken A/S defaulted and when important depositors as well as senior bondholder impairments were applied. Denmark, which is and was at the time a member state of the European Union, pegs its currency, the Danish krone, to the euro.
As usual, the whole financial assistance operation was composed and agreed on Saturday morning in Brussels by what’s known as the Troika, which is the tripartite committee of the European Commission together with the European Central Bank (ECB) and the International Monetary Fund, and we now have to wait for a yes or no acceptance vote on the Troika’s “financial assistance” package by the Cypriot parliament.
In my opinion, the eurozone has set a very dangerous precedent. I have no doubt it is now prone to having to face more than one single bank run, of which the first one could probably start later this week when the banks reopen in Cyprus. Already, the head of the Cyprus Central Bank told lawmakers they should consider 10 percent of deposits fleeing when the banks reopen.
We can no more exclude other bank runs occurring in different places at different times inside the eurozone, once savers and investors start understanding a little bit of the problematic situations the eurozone is in once again.
Please don’t misunderstand me. I’m not saying that bank runs will happen. Keep in mind the ECB has enormous powerful means at its disposal to come to the rescue endangered banks.
In the context of long-term investing and as a retail investor, I’d keep my preferences pegged on the United States, even though policymakers in Washington aren’t of great help at all at this moment.
That said, I still expect a market correction occurring in the foreseeable future, and therefore, I prefer safe and highly liquid cash equivalent U.S. instruments as well as the U.S. dollar itself.
I’m still convinced there will be a lot of investing opportunities in the United States as well as many other places around the globe, but we aren’t there yet. I’d prefer to remain patient, even when that’s easier said than done.
On the other side of the pond, the eurozone could well be on its way to losing another wheel because policymakers don’t seem to care enough about the huge variety of potholes (social, financial and economical) in their road to a better single currency society and economy.
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