some supplementary thoughts at the end of a tumultuous weekend.
After a surprisingly long gap, the verdicts from the Investment Bank research departments are dripping in. In short if you can sell euros at Friday’s close you probably should (you can’t – pre-pre-market at 6pm London or 7am Auckland is about a percent off) but the tone is one of wariness rather than panic. The absence of Street research interest probably tells a bigger story than what they actually say. Only Barclays bothered with the Sunday conference call, but we’ll probably get more chances to dial in and be told that the research houses don’t really know what’s going on. We can also enjoy the spectacle of people who right now couldn’t name him interpret the importance of the intervention of Archbishop Chrysostomos. Not for the first time, Twitter was ahead of expensive analysts in concern about deposit haircuts.
- This is not going quite as smoothly as planned. The Cypriot parliamentary vote has been postponed and a Bank Holiday announced for Tuesday (following the usual one tomorrow). Basically inconceivable that the levy will be revoked, but there may be some noise around finally getting it through. A la TARP or EU referendum, the question will be asked until an acceptable answer is received.
- The central mystery boils down to “WHAT THE HELL WERE THEY THINKING?”.
Haircutting Taxing small depositors doesn’t only violate the principle of social equity, it hurts a lot of people and creates political and logistical difficulties without playing a central part in raising the cash.
Some metrics around deposit distribution: poor people have very little cash. I haven’t managed to track down statistics on Cypriot deposits (if they exist) but: in the UK 2% of depositors account for 49% of deposits. The median savings of the bottom half by income of the population is £400. Cyprus is an only marginally more equal society than the UK (Gini of 0.3 vs UK 0.33), a somewhat poorer one, so it doesn’t seem unlikely that a floor of say EUR50,000 would massively reduce the number of people captured but not hugely impact the amount of deposits. Update: can’t find the original source, but Table B here makes point even better.
- In terms of risk, my own best guess is that this increases the risk of wider European bank runs from vanishing to miniscule. That risk is all the bigger because more depositors are drawn into the net. But Cyprus clearly is different, with bank assets 8x GDP and foriegn deposits of dubious origins alone over 100% of GDP. At 0.2% of the Eurozone economy it can get a “take it or leave it” ultimatum.Spain or Italy won’t.
- In this context it may be worth bearing in mind the German view: “Take it or leave it” is still a choice. ‘Don’t need a European bailout in a German election year’ is sound advice, and – small savers aside – this plan has a lot to commend it, with the burden of debt relief for once falling on creditors (unlike Ireland) – newsflash: when you deposit money in a bank you’re making a loan) – being clearly sustainable in debt:GDP terms (unlike Greece).
- Probably of more lasting importance is the latest bout of rule-changing by the authorities. Debt unwindings are generally well-defined in law. First equity, then sub debt, then deposits and senior bonds together, and all treated equally. Most of these principles have been tweaked over the last few years, but the tweaks are getting steadily more aggressive. The ECB, holders of Athens-law and foreign law Greek debt all got different treatment; the Dutch didn’t restructure SNS Reaal paper, they confiscated it; the Irish banned lawsuits against the ultimate wind-down of Anglo Irish. This is scratching the surface compared with the rule-changes of the past but it’s getting steadily more creative.The referee has gone from being quasi-neutral arbiter, to pulling off his black shirt to reveal a Manchester United one underneath and awarding himself a series of penalties. While there’s clearly no point in market participants playing the shocked blushing virgin in the face of a situation where the consequences of following the legally-logical steps are socially unacceptable, the uncertainty generated creates costs too.
It’s going to be an interesting week. I think it’s unlikely to be a traumatic one, but I’d feel more comfortable if there weren’t quite so many journalists gagging for a bank run.
Update: journalists or Nobel prize winners
Update: Thanks Joe, but was really just pulling chains on the sell-side. Some phenomenally smart people there, shame sell-side social media policies so short-sighted