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The Cyprus Bailout Fiasco: European Markets Roll with the Punches
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Although the aftershocks created by the botched Cyprus bank bailout are by no means over, the news this morning is on balance reassuring. At least we should be thankful for small mercies: the European banking system is still standing.

While the crisis has precipitated bank runs in Cyprus, depositors elsewhere seem to have remained remarkably calm. On the negative side perhaps the biggest surprise is the extent of markdowns in bank stocks. The victims include not just the obvious suspects in Spain, Greece, Portugal, and Ireland, many of which have predictably taken hits of as much as 4 percent or more this morning, but the French and Italian banks. Even German banks have not been spared, with Deutsche Bank one of the worst hit. What is more remarkable is the impact on British and Swiss bank stocks. In early trading, Barclays, HSBC, Lloyds, and UBS have all taken hits in the 2 to 4 percent range. Given that neither the U.K. nor Switzerland is in the eurozone, these nations are protected by a robust firewall from the worst financial lunacies emanating from Brussels and Berlin. The markdowns clearly spring less from solvency jitters than from concerns that the crisis will further delay a sustained global economic recovery.

At the center of the storm is a proposal — not yet finalized — to force haircuts on small depositors in Cypriot banks. These depositors had been assured that amounts up to 100,000 euros were inviolable but now the Eurocrats want to impose an “asset tax” on all deposits. Nobody is fooled by the semantics. This is a clear breach of faith on deposit insurance and bodes ill for bank depositors throughout the eurozone.

As for the press, the scorn in Britain for the Eurocrats’ latest fiasco is unbounded. As Alex Brummer, financial editor of the Daily Mail, points out, by stiff-arming small depositors, European banking regulators have crossed a Rubicon. Brummer adds intriguingly that Russia was a party to the rescue. Apparently Moscow is thought to have agreed to contribute up to 2.5 billion euros to the overall rescue package. Brummer comments: “It is protecting its strategic interests as well as those of Russian citizens.”

Perhaps the most coruscating comments have come from the normally measured Financial Times. Referring to the strangely unbalanced structuring of the Cyprus bailout, the paper points out that unsecured senior bondholders are not being asked to take a haircut. The paper comments: ”While Cypriot banks have very little bonded debt outstanding – a mere €1.7bn, as against some €70bn of deposits – this is still significant compared to the €5.8bn the deposit tax will raise. It also circumvents the legal status of claims on bankrupt debtors in a way that hurts ordinary depositors to benefit sophisticated investors. This is destabilising as well as morally unconscionable.”

In an editorial, the FT adds: “The prescription of universal austerity combined with kid-gloves treatment of big investors in banks is increasingly toxic to European voters. Leaders have just added fuel to the fire.”

(Republished from Forbes by permission of author or representative)
 
• Category: Economics • Tags: Banking System, Cyprus 
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