Sunday, 17 March 2013

After Cyprus: what time the short squeeze?

There has been for the last 24 hours widespread hysteria among the commenting classes about the supposed Lehman II, The Sequel-type significance of the 6.5% to 9.9% haircut imposed this week-end on Cypriot account holders.

According to their myopic and apocalyptic reading, a moderate haircut on a few people who were getting large deposit rates (6% etc) for the best part of the last 3 years in order to compensate for the obvious and well-known risk of leaving their money in long-economically bankrupt Cypriot banks, will in fact trigger the mother of all bank runs in Southern Europe.

Obviously, the fact that the Eurozone crisis is foremost a political and institutional crisis, not a financial one, has been lost on them. I can understand the boringly traditional - I have seen it at work so many times - North American incomprehension at the complicated workings of a Continent with not one but - how mind-boggling! - several different national states. This failure to encompass European political issues basically makes Americans today routinely translate the Cyprus thing as the pan-European equivalent of the FDIC suddenly closing down for the whole of the US.

Well, as those guys probably will find out quickly enough next week, this ain't the US and this ain't the FDIC. Sell on Monday morning and get short-squeezed by XXXday afternoon is probably how it will run again, especially as the bank run in Southern Europe already happened a few years ago, remember those Target 2 balances? And getting short on old news is one of the surest recipes for disaster I know.    

In fact, the EU-wide decision of not getting European taxpayers to pay for the governance-free, intentional free-riding of another midget-state is probably the best medium-term news to come out of Brussels for a long, long time and shows some realism finally creeping into what has been so far a globally denialist management of the crisis. It at last shows national states that their responsibility actually starts somewhere and that not everything is permissible for ever, a healthy warning.

Greece was peripheral to European construction, and European taxpayers have paid dearly, but Cyprus is not even that. Frankly, who cares about it at all, except because we have to, thanks to some reckless accession treaty we once signed to please ... Greece. And as to the domestic political consequences of  the marginal difference of some "ordinary" Cypriots being taxed 6.5% of their cash holdings, instead of all law-abiding "ordinary" Cypriots - i.e. taxpayers - getting taxed, well, who could care? 


Alexandre Delaigue said...

It won't surprise you that I disagree on this one.

- "pour encourager les autres" might work, if there is a rule. There is not here. Every country is different. The "midget" pays more.

- The question is indeed political. But cypriot voters did what Europe asked : they voted for the europe guy. And they are screwed to protect the chances of a russian help. Why not limiting haircuts on foreign depositors? That would have been responsible.

- Interest rates on deposits in cyprus are irrelevant. It's like saying "you didn't know all euros are not the same? Well, you know now". It is very, very dangerous. Either european leaders can convince that this won't happen again (and they are already saying that this may well happen again) it means the eurozone is a currency peg, not a single currency. We are now estimating that there won't be a bank run because of transaction costs. this is precisely a currency peg argument.

- Even whithout a bank run (that I think won't happen) the answer now (as pisani-ferry said) is to put your money in germany, switzerland or Luxembourg. Which is precisely what OMT's had stopped and started to reverse. It's creating more imbalances and more long term problems.

- Cost-benefit doesn't work here, compared to a solution with bondholders taken and bigger haircut to non-residents, protecting people under the 100 000 euros deposit protection threshold. All the above mentionned costs will be supported for what? A feel good feeling of morals against a smallish tax haven?

Henri Tournyol du Clos said...

1 - The midget pays more - Well, no, as a matter of fact, that's not a rule. Iceland, even more of a midget, managed to get out for free from what was roughly the same kind of huge confidence trick.

2 - "Political" means European politics. Internal Cypriot politics are 95%+ irrelevant. Their internal agreements are of little import to hard, external reality (their banks are broke and the ECB can pull the plug at any time). It is much more important to convince Northern European voters not to halt Euro-Zone institution building than to now go out of our way to buddy-up to Cypriots who anyway do not have a choice and whom we have had to strong-arm into facing reality anyway.

3 - Interest rates on Cypriot deposits are certainly not irrelevant, quite the contrary. If you get 6% to put your term deposits in (Cypriot) Bank A rather than 0.50% in (Reputable) Bank B, then you are getting paid for assuming credit risk. This is the very basis of interest rate markets.

4 - OMT is not in use, will come in handy in the eventuality a bank run actually happens in one of the hard-pressed states (Italy, Spain, etc) that cannot afford to recapitalize its banks.

5 - Cyprus is foremost a tax haven to Cypriots, I hear, very much like Greece is a tax haven for Greeks... The below-insurance threshold haircut looks more to me like a fiscal expedient to actually tax unwilling local taxpayers, and will be of little importance to, er, anyone on the planet who is not a Cypriot taxpayer, ie roughly 7bn people.