In the early hours of this AM the Eurogroup came to some kind of agreement with Cyprus that rather sneakily they feel has avoided the process of ratification in a Cypriot parliament.
Last week was a rather tense affair as the original deal was sent back to the drawing board as the Cypriot government rightfully so did not approve it. However Cyprus was caught between a rock and a hard place on this one and probably more a victim of bad timing than anything else.
A year or so ago and perhaps Cyprus would just have received a normal bailout and made undergo the usual Troika treatment that has been inflicted upon, Greece, Ireland, Portugal etc. This time is different however, Northern Europeans (read Germany) are suffering from bailout exhaustion and FrAU Merkel has an election to win this year so it was never going to end pretty for Cyprus. Throw in the mix that Cyprus is a tiny faction of the overall economy and flooded with less than honest Russian money and the Eurogroup were not really going to budge on this one.
The original terms of the deal saw the EU giving EU10bln to Cyprus and making them come up with EU5bln form their deposit base in their very heavy banking sector. I.E taxing every depositor in a Cypriot bank , those with EU100k in savings or less would have been subject to 6.75% tax and those above this mark 9.9%.
Now the “deal” looks more like this:
Those with deposits of EU100k or less in poplar bank of Cyprus (AKA “Laiki Bank) will have their deposits moved to Bank of Cyrpus in an effort to create a “good bank” those with more will have their assets frozen and a certain percentage of their deposits will be swapped for equity in Laiki bank ( or “bad bank”) in a “deposit for equity swap.”
Reaction is mixed so far in markets and not by any standards is there any panic- but to me it goes without saying that the main issue here is capital flight. If you are a depositor in a bank in a troubled eurozone economy why would you take the risk that in the future the bureaucrats in EU will come along and help themselves to a share of your savings. you have to ignore the fact that the majority of the depositor base in Cyprus is made of Russian money – the source of which is open to interpretation and not for me to speculate on. But the precedent has been set and to me that’s all that matters.
The EU has messed with the one thing that I felt was sacred in a bank in that if you were prudent and saved money you would be protected again you must ignore the fact that Cyprus is a special case here and look at the precedent that has been set.
It remains to be seen if this is going to set off a tidal wave of depositors rushing for the exit door of EU banks and it is certainly not an advertisement in my mind to come and do business here.
This could be the final nail in the coffin for the EU as we know it and I feel 5 years from now the landscape will look a lot different. More than likely a “good EU & and Bad EU.”