In the slow motion train wreck, which is the gradual disintegration of the Euro, the only thing that never ceases to amaze me, is the determination of the bureaucrats to create perpetual crisis. Despite all of the indecision and lack of cohesion on strategy, nothing like Saturday’s Cypriot bailout had seemed possible.
In the end, a continent of socialists seemed unlikely to actually go after the bank accounts of depositors—those people vote. It always seemed like some nondescript acronym would magically be conjured up to bail out the crisis. Who would pay the bill? The average person never had to think about such things. Sure, there was talk of austerity, but no substantial cuts were actually made—instead, the growth of government largess simply slowed down a bit. The rules just changed on Saturday.
Let’s look at the numbers; if you had over EUR 100,000 in a Cyprus based bank, you lost 9.9% of your deposits and 6.75% if the balance was under EUR 100,000. In total, depositors will lose roughly EUR 5.8 billion through this program. Ever since the bailout started in 2008, the arbitrary response to each crisis seems to only confuse the capital markets further. Why are Cypriot depositors on the hook, while Greek banks get bailouts? Irish banks crashed and their people owe the tab—why is Spain being given a Euro Zone guarantee?
Now, let’s think critically about this. In 2012, the European Union had a GDP of roughly USD $17.5 trillion. Cyprus had a GDP of about USD $25 billion. Shreveport, LA and Portland, ME each have roughly the same ratio of GDP to our country’s overall GDP. They’re complete rounding errors to the overall US economy. Detroit’s GDP is 5 times the size of Shreveport and Portland combined—it just went bankrupt without ripple effects—they didn’t ask depositors to take a haircut on their loans.
When you look back at the 2008 banking sector implosion—the real line in the sand was drawn when the US government agreed to guarantee all bank loans—even beyond the prior FDIC threshold. What this did was ring-fence the issue to those who owned the equity, debt or guaranteed financial products of various institutions. Unlike prior financial panics, depositors were protected and there were no lines outside of bank branches demanding their deposits back. Once you see one depositor line, your natural reaction is to line up at your own bank—just to be safe.
Previously, the erosion of bank deposits in the Mediterranean countries was a slow leak as money left to Northern European banks. There was no panic—instead; the prudent were slowly moving capital. On Monday, there are no longer any rules. If your country’s banks are in trouble, your deposits are at risk. What do you think happens in Spain? What about Italy? There will be a tidal wave of scared money looking for a new home. If your bank was previously on the ropes, the ECB has effectively closed your doors
When economic historians look back on the unraveling of the Euro Zone, yesterday will likely stand out as the turning point where a slow collapse turns into a rout. I don’t expect a panic on Monday—rather, the events that previously moved at a crawl will suddenly get up and run—particularly at the slightest hint of stress.
The depositors of Cyprus are going to lose EUR 5.8 billion—the Euro Zone is going to lose their whole banking system.