As we have always said, the real test will occur when the capital controls are finally removed, which is due to happen at the start of next year according to the Cypriot government. There is also one other concern (in terms of bank deposits, there are many concerns when it comes to Cyprus generally) – as deposits have fallen the Cypriot banks loan to deposit ratio has jumped (as the graph below from the IMF shows).
This is not unexpected, but does represent a potential risk for the banks and highlights that their reliance on ECB and ELA funding will remain for some time. That is at least until they manage to deleverage significantly and (we’d imagine) write down some of their bad loans.
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And writing loans off will mean making losses and capital problems.
Capital problems will very likely mean that a new bank bail out will be required.
And we get to 2.0 or 3.0 at that time of the Cyprus story.
When you that far gone and have made everything connected with everything else things are nearly impossible cleaned up in one time. What we see here deposits linked with banking health. Bail ins likely are tanking consumption and the economy. Banks not even remortely able to adjust their BSs to the new circumstances. Etc etc. Sort of neverending story.
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