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Analyst Say the Cyprus Banking Deal Could Be a Trigger for Disaster, Bank Holiday Declared, Systemic Consequences Rise

“On Thursday, Société Générale analysts made a prescient call on Europe.

“It is far too early to dismiss euro area crisis as a key [market] driver,” wrote SocGen’s Vincent Chaigneau. “We fear another shockwave in the spring.”

As it turns out, they may not have had to wait very long. News this weekend that the ECB, EU, and IMF bailout of the Cypriot banking system will include an instant 10 percent “tax” on bank deposits before banks re-open following Monday’s holiday has already triggered runs on ATMs there.

Now, the banks have a problem on their hands. “The Cypriot cabinet has declared Tuesday a bank holiday, for fear of capital flight, and this may even be stretched to Wednesday, as depositors are certain to withdraw huge sums from the Cypriot banks after the haircut imposed,” reports Greek newspaper Kathimerini.

Many market observers are expressing concerns that the decision could have a ripple effect throughout Europe come Monday when markets open. After all, if European leaders have decided to violate the unspoken rule of bank bailouts – that deposits are sacrosanct – what’s to say it can’t happen in a bigger eurozone country, like Spain?

In a Sunday morning note to clients, Morgan Stanley economist Joachim Fels wrote, “I view this as a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future.”

“This will probably go down as an ill-thought-out rescue plan with consequences for peripheral Europe,” says Galy. “It breaks a cardinal rule — namely, public trust on which money relies.”

The decision, therefore, has everyone scratching their heads. Why would European leaders play with that public trust in bank deposits?

The SocGen report last week predicting a new eurozone “shockwave” this spring summed it up concisely: “Germany, now six months into a general election, will not be keen to share further risks and tolerate policy slippage.

In other words, German politicians are up for re-election in September, and bailouts of other countries with German taxpayer funds don’t help their cause much. So, Cyprus had to be made to share in the burden somehow — hence the haircut on deposits…..”
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  1. ultramarine

    I should of guessed some new bad financial news was going to come out of Europe, as they have been quiet too long. I wonder what impact there will be this week on the markets, if any?

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  2. ultramarine

    Doh! I guess the dollar will get stronger (I should have known that…)

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