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Berlin, Bankenkrach, Andrang bei der SparkasseAh Uberdruken das Geld? Dass bringt mich zuruck. Solche Zeiten!

Slowly a mood of concern is changing to one of panic.  And it was all so very unnecessary.  First a short history.

Cyprus, a small island in the eastern Mediterranean, has been hit by banking problems as have other members of the European Union.  Cyprus has received a $13bn bailout for its banks following talks in Brussels with eurozone leaders (Germany) and the International Monetary Fund. But the conditions attached to the deal have led to a run on the country’s banks.

That Cyprus and its banks need a bail out was obvious. The banking sector is absolutely vast compared to the size of the economy.  This was because it was the haven of choice for Russian deposits of laundered money.  The banks are bust because they unwisely invested in Greek Government bonds which then suffered two substantial haircuts.

So banks in Cyprus needed money to recapitalise.  Cypriot loans are being rescheduled, and the government will sell off assets to help plug the gap and so on.  The Eurozone will provide the bail-out money.

But on a condition that is surely insane.

It comes with an “emergency solidarity contribution” will force savers in these banks to see their bank deposits undergo a 6.7%-9% “haircut”,  while bondholders (those who own the shares in the banks) will not suffer any losses at all.  The reason for this is that the lenders do not want to be seen to prop up hot Russian money and this “tax” is to get some back and act as a deterrent.  But by applying this “contribution” to all savers, small and local as well as large and foreign, they have kicked a wasp nest.  It is not a contribution it is theft pure and simple.

The offer of Bank Equity by way of compensation has gone down like a plate of cold domades. I mean who the hell wants bank shares?

ATM’s have been emptied across the island.  And while depositors will not be able to shift all their money, as the government has frozen the 6.7 or 9% tax element, you can bet that Tuesday, when the banks reopen after a local Monday holiday, will be frenetic as they shift the balance.  An empty bank account being a safe bank account.  Actions which could crash these banks as effectively as anything.

This Cypriote government is finished.

This insanity – there can be no other term – in chasing hot Russian money round the continent may sink a raft of euro banks. What’s to say that what can be done to depositors in Cyprus’ banks, cannot just as easily be repeated for Greek, Italian, Spanish ones?  It is of course being billed as a “one-off”, but then savers remember that Greece was unique, Ireland was unique, Portugal was unique, and Spain was unique.  You can only have so many one-offs and remain believed.

If you have deposits in Spain or Italy or Greece or Portugal what will you be doing come Monday morning?  Exactly.

Moreover, this is bound to further inflame the political situation in Italy, where Beppe Grillo’s Five Star Movement is already the largest party.  If the EU wasn’t yet scared enough of Beppe Grillo and his still surging popularity, now would be a good time to start being afraid.

Even if in the face of massive demonstrations that the people are angry, the spineless bunch of euro apparatchiks back down and reverse this levy the damage will be done.  People will still move their money out of banks – just to be on the safe side.  An official said today that Cyprus’s parliament had postponed the debate and vote on the controversial levy on all bank deposits that the country’s creditors demanded in exchange for €10billion [£8.7million] in rescue money

So what will they do?  Will they re-invest in US Banks, keep it as wads of cash behind the clock on the mantelpiece, or change the useless Euro into gold coins and keep them in a sock under the mattress where the Germans cannot find it, just like granny did? All of which make sense on a personal basis but deny industry and business desperately needed capital to generate growth.  Growth which would get us out of this mess.

And, regardless of whether the U.S. needed to get involved in say propping up banks exposed to Europe, the European economy would likely suffer the equivalent of a heart attack.

That wouldn’t be good news for the U.S. economy.

Or the Chinese economy or any other economy that sells things to Europe.

So, you can see, this little decision to seize a little money from bank depositors in the little island of Cyprus could be a much bigger deal than you think

An Archduke Ferdinand moment for European banks?

CODA BREAKING NEWS Nicosia has declared Tuesday a bank holiday as well and might extend this to Wednesday.

Copyright David Macadam 2013