Tuesday, May 28, 2013
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Cypriot bailout proposal Dead from the start Greek depositors ready to withdraw a good chunk of deposits
Cypriot bailout proposal Dead from the start Greek depositors ready to withdraw a good chunk of deposits
Interestingly, while some of the media and politicians are claiming that the "bailout" for the Cypriot banks is necessary, we have to see the fundamentals:
Bank deposits in Cyprus are something like 50-60 billion euros. An amount of 10bn euros that is being loaned out to Cyprus does nothing for the banking system, if it is coupled with a collapse of trust: More than 10 bn in capital flight will ensue such measures, thus nullifying the loan and its purpose (to stabilize the banks). So what next? A new loan? A new haircut for depositors?
Greek depositors (in Greek banks) are already planning to go out and take billions of deposits out of the Greek banks when the banks open. Some Greek banks are subsidiaries of Cyprus banks and they are managing some 20 billion in Greek deposits. While they are not affected by the Cyprus haircut, Greeks will panic and go to these banks to withdraw their money. But this also applies generally, to any Greek bank. People understand that if this has happened to Cypriots, it can also happen to them. It is probable that we can see withdrawals of up to 20-30 billion euros or more in the next couple of weeks/months, out of the 160 billion that were in the banking system in the start of 2013. That will require new loans from the Greek government to stabilize its own banking system, leading to a vicious cycle of more unsustainable debt, more interest, more deficits, more austerity and more recession.
Bank deposits in Cyprus are something like 50-60 billion euros. An amount of 10bn euros that is being loaned out to Cyprus does nothing for the banking system, if it is coupled with a collapse of trust: More than 10 bn in capital flight will ensue such measures, thus nullifying the loan and its purpose (to stabilize the banks). So what next? A new loan? A new haircut for depositors?
Greek depositors (in Greek banks) are already planning to go out and take billions of deposits out of the Greek banks when the banks open. Some Greek banks are subsidiaries of Cyprus banks and they are managing some 20 billion in Greek deposits. While they are not affected by the Cyprus haircut, Greeks will panic and go to these banks to withdraw their money. But this also applies generally, to any Greek bank. People understand that if this has happened to Cypriots, it can also happen to them. It is probable that we can see withdrawals of up to 20-30 billion euros or more in the next couple of weeks/months, out of the 160 billion that were in the banking system in the start of 2013. That will require new loans from the Greek government to stabilize its own banking system, leading to a vicious cycle of more unsustainable debt, more interest, more deficits, more austerity and more recession.