Bank Deposits are now At Risk in the rest of Europe

Dijsselbloem

For those individuals holding cash in a European bank, be aware that as Jeroen Dijsselbloem, the President of the Eurogroup proved in recent weeks, creating a precedent with money being effectively confiscated from depositors in Cyprus, that you may be at risk.

Will such an incident occur again? They say Cyprus is a “special and unique case. We get the distinct feeling however that Germany is getting tired of the bailout model and with the help of Mr. Dijsselbloem, it seems very likely that they will want to apply the new “bail-in” model whenever possible.

Over the last 2-3 weeks we have been veritably bombed with news coming from Cyprus regarding its bankrupted financial system and the plans to save what was left from its wreckage. With her banks holding cash levels way beyond what would be expected given the country’s economic level with the country being an open door for capital coming from Russia in particular (origin unknown!) the IMF, along with both the European Commission and the ECB, decided to “punish” the country with the desperate measures of a levy on deposits held in certain Cypriot banks.

The measure was initially vetoed at the Cypriot parliament as no government could survive such a bold and blind measure. Nevertheless, while deposits less than €100,000 ended up being protected, deposits over that amount wound up being heavily confiscated. Currently, a levy of 37.5% was decided while 22.5% will also be kept just in case more is needed. Do the maths – thats a 60% immediate wipeout for some savers. To avoid wholesale capital flight out of Cyprus in a disorderly manner, capital controls were imposed which will be lifted whenever possible, but in practice this may mean in years from now. Such a confiscation of deposits was a bold measure that will send Cyprus to the pond for many years. The services-based country will now have to chose a very different way of living and it will likely scar the current generation.

Unfortunately, the problems don’t stop in Cyprus. As we have relayed here at SBM, there is a chance that the EU, having gotten away with this “bail-in” system once, now applies it to other troubled countries. Dijsselbloem has raised concerns by giving the idea other countries may follow, even specifically warning Malta and Luxembourg of their potential woes given their outsized financial sectors. It is true that some of his comments were then “polished” but that was just to avoid panic.

At this point, there are very real reasons for concern. Let’s start with Italy. Banca Monte dei Paschi di Siena (BMPS) just issued a statement only last Saturday saying the bank has lost billions of euros in deposits in February. The bank’s CEO attributes it to the loss of clients due to the derivative cheating scandal that haunted the bank but, truth is, that we have reasons to believe that at least part of the outflows may be attributed to what happened in Cyprus.

The problem with BMPS and with many other banks, relates to their balance sheet structure. There is not much in the way of readily convertible securities below the depositsand which means that, if they need funds, and the same bail-in model used in Cyprus is applied, that depositors will simply have to lose money. That is a risk many funds and investors simply do not need to take and which will likely have currency impacts. We have already seen this with the pound in recent weeks adding nearly 3% against the euro (contrary to the doomsayers who predicted armaggedon at the beginning of March after the AAA downgrade of the UK). Check out the latest edition of our magazine in which we make the case to buy the pound (link – http://issuu.com/spreadbetmagazine/docs/spreadbet_magazine_v15_generic)

Spain is also at the centre of our concerns. The country’s banks are simply broken. They were too heavily exposed to the home loans/residential real estate sector which, as the result of the heavy recession in this sector, have become heavily impaired. As the banks realised they will never recover that money, it has became apparent most of them would need a bailout to survive. Indeed, the Spanish Government nationalised some of them just recently and injected more than 40 billion to save the financial sector but, the problems are far from being solved.

A few days ago, three small Spanish banks, Banco CEISS, BMN and Caja 3, had to take big write-downs on bad property loans and assets. In total those three banks booked €8.3 billion in provisions for real estate bad debts. More banks are likely to follow and cause additional problems for the Spanish Government.

In Portugal, her banks are relatively stable after all the stability measures applied but Government uncertainty is rising again. Only last week an important minister, Miguel Relvas resigned, and there is huge controversy regarding austerity that is being applied which can actually be reversed by the Constitutional Court. If the Government is condemned to revert many of these measures, then it will most likely fall. A period of instability may lead to a nervous troika that may force some desperate measures yet again.

We don’t want to scare anyone, but think one should remain alert for a possible scenario that may follow the lead in Cyprus. The massive structural debts are not going anywhere and the heat is now getting ratcheted up.

Get used to the idea that depositors will now be treated as senior bondholders. At most, they are in fact paid pari-passu with other senior creditors but at others they are effectively unsecured creditors. And so, aswell as depositing money at rates of near zero, remember that you are in fact investing in a risky business that most certainly is not paying for the risk you incur. Rational investors will most likely avoid these risks at all costs now and that’s yet another unfortunate situation for the Eurozone.