Back to Cyprus, and ZeroHedge has a disturbing story:
While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.
No one knows exactly how much money has left Cyprus’ banks, or where it has gone. The two banks at the centre of the crisis – Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus – have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia’s Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks’ largest depositors.
So while one could not withdraw from Bank of Cyprus or Laiki, one could withdraw without limitations from subsidiary and OpCo banks, and other affiliates?
I was wondering why Russia hadn’t kicked up a big fuss, and threatened to cut off gas supplies to Europe at the height of the current big freeze. Now I see why. They had other ways of pulling the money out of Cypriot banks.
Since insured depositors with less than €100,000 in Cypriot banks are now to be protected (which they weren’t a week ago), it would appear that the main losers will be wealthy Cypriots and any other depositors who had the misfortune of not living in Britain or Russia when the banks closed.
But are European depositors safe now? Yesterday the Telegraph reported:
The euro fell on global markets after Jeroen Dijsselbloem, the Dutch chairman of the eurozone, told the FT and Reuters that the heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe.
“If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?’,” he said.
“If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders.”
Ditching a three-year-old policy of protecting senior bondholders and large depositors, over €100,000, in banks, Mr Dijsselbloem argued that the lack of market contagion surrounding Cyprus showed that private investors could now be hit to pay for bad banking debts
However, having said that yesterday, he backtracked today and said that Cyprus was a “special case”.
And today the Portuguese finance minister said the same, only to also promptly retract his remarks.
They’re just making the rules up as they go along. And if you didn’t think they could do that, then stand corrected by Britain’s Chancellor:
Mr Osborne also said he didn’t question the legality of the capital controls, since Article 63 of Europe’s internal market rules can be bent in an emergency.
No wonder the EU enjoys having all these numerous emergencies: it gives them the opportunity to ‘bend the rules’. In fact, as far as I can see, they bend the rules any time they want to. In the circumstances, it’s not surprising that depositors are getting nervous:
16.01 There is anecdotal evidence that British ex-pats in the eurozone periphery are nervous about their deposits in Mediterranean banks. Financial advisory firm deVere Group say they’ve experienced a “surge” in inquiries on moving funds elsewhere. Nigel Green, chief executive, said:
Over the last week, since the messy deal to bailout Cypriot banks began, our financial advisers in these areas [Spain, Italy, Portugal and Greece] have reported a significant surge in enquiries from expats who are looking to safeguard their funds in other jurisdictions which are perceived to be safer.
Whether the institutions like it and accept it or not, there is a real risk of a major deposit flight from these countries as people feel their accounts could be plundered next.
ZeroHedge seemed to think the whole point of the Cyprus bank heist had been to loot the accounts of a few Russian oligarchs. But I think the EU is simply doing everything it can to hold the eurozone together, and keep member states inside the EU. It’s their political project, and they’ll do whatever they have to to keep it together, including robbing people’s bank accounts if necessary. And they definitely don’t want anyone doing what Paul Krugman advises:
Cyprus should leave the euro. Now.
The reason is straightforward: staying in the euro means an incredibly severe depression, which will last for many years while Cyprus tries to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding.
If you look at Cyprus’s trade profile, you see just how much damage the country is about to sustain. This is a highly open economy with just two major exports, banking services and tourism — and one of them just disappeared. This would lead to a severe slump on its own. On top of that, the troika is demanding major new austerity, even though the country supposedly has rough primary (non-interest) budget balance. I wouldn’t be surprised to see a 20 percent fall in real GDP.
It’s not just Cyprus, in my view. Everyone should get out of this utopian political pipedream. The longer they stay in, the worse the damage will be.