By Surly Trader
With a slight shrug, the markets seem to be just fine with the deposit seizures whereby the EU is raiding private bank accounts within the small country of Cyprus. The initial talk was to tax every depositor under €100,000 at 6.75% and those over that amount at 9.9%. And who should care with a tiny economy that makes up just .2% of the Eurozone GDP? You should.
It turns out that just a few weeks ago the finance minister of Cyprus himself would never have believed this would happen:
Cyprus’s new finance minister on Friday ruled out a haircut, or imposed losses, on bank deposits to ease a financial bailout from international lenders, now stalled amid worries about debt sustainability.
“Really and categorically – and this doesn’t only apply in the case of Cyprus but for the world over and the euro zone – there really couldn’t be a more stupid idea,” Michael Sarris, who took over his post on Friday, told reporters.
The outcome of this “tax” really no longer matters. The sad fact is that even Germany understands that, “Last Euro-Crisis Taboo (has been) Broken“.
What is stopping every depositor in Portugal, Spain, Italy and Greece from pulling their money out? Why would you leave it in when the rules are changed overnight?
The worst case has always been a Europe wide “run on the banks”. Let’s just see how much fuel they added to the fire.
From the business daily Handelsblatt in Germany:
“The currency union has committed a breach of trust. It weighs especially heavy because the euro states have already secretly been rehabilitating their economies at the expense of depositors. Low interest rate policies help bring down the national debt, but at the same time they gradually deplete the balances of savings and money market accounts. The pensions of many citizens are also dwindling.”
“Anyone who now believes they shouldn’t be interested in the fate of individual depositors on a remote Mediterranean island is mistaken. Cyprus sets a precedent. What happens there can also happen elsewhere. In Spain and Ireland, bank bailouts have allowed the national debt to explode to an unsustainable level. There, the euro zone could see tapping into bank accounts as the next step. In principle, no European depositor can remain assured that their bank balance will remain untouched — even in Germany.”
SurlyTrader is a portfolio manager at a large financial institution who specializes in trading derivatives.