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Monday, March 18, 2013

While everyone is speculating about contagion to other eurozone countries: What are the Italian and Spanish press actually saying about the Cypriot bailout?

Analysts - led by Anglo-Saxon ones - have lined up to say that, following the deposit levy as part of the Cypriot bailout, a bank run on the rest of the Mediterranean is now a near certainty.

New York Times columnist Paul Krugman went the furthest, arguing that
It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying “time to stage a run on your banks!”
But for all these speculations, very few analysts have actually bothered to properly assess the mood and immediate reaction in Italy and Spain - whose depositors are meant to be lining up outside banks and cash machines to withdraw all their savings. Surely, the response and tone in the media of these countries on the day following the deal will give a pretty strong indicator as to whether Italian and Spanish depositors will perceive themselves as being 'next in line', or whether, in fact, they consider the Cypriot situation unique.

As Mats Persson argued on his Telegraph blog yesterday,
Fears of deposit-led contagion to other parts of the eurozone should definitely not be be overstated...viewed with a depositor's eyes from Barcelona or Bilbao, Spain may have very little in common with Cyprus.
Of course, this is all very hard to predict and if talks about a bailout kicks of in Spain and Italy, will depositors trust what politicians are telling them? But what do governments and pundits actually say in these two countries? Put differently, what did Spanish and Italians depositors actually hear when they woke up to the news that their Cypriot counterparts will now see their savings taxed?

Here's a summary.


Italy has some relatively fresh memories of a deposit levy: the 0.6% prelievo forzoso from all Italian bank accounts enacted by the government led by Giuliano Amato in 1992, when Italian public finances were facing an "extraordinary emergency". So one would expect the Italian media - and Italians themselves - to make a pretty big deal of the Cypriot bailout.

Not quite.  Although Italy's borrowing costs have inevitably been driven up a bit by the news coming from Cyprus, the media is surprisingly relaxed (and certainly no queues outside ATMs). Of the largest Italian papers, only La Repubblica and La Stampa made some room for Cyprus on the front page of today's print edition. Pope Francis and Italy's own political troubles continue to dominate. However, some Italian commentators did flag up the risks involved in the Cypriot bailout for the rest of the eurozone.

Vittorio Da Rold of Il Sole 24 Ore calls the Cypriot bailout "a dangerous precedent which undermines confidence" in the eurozone.

Italian economist Giulio Sapelli put it more bluntly,
Stuff like this can generate bank panic throughout the EU. [European leaders] are crazy.
Ferruccio de Bortoli, editor of Il Corriere della Sera, has tweeted that Cyprus's deposit levy "risks creating uncertainty and fears".

Unsurprisingly, the authorities' reaction was targeted at being a lot more reassuring. Giuseppe Vegas, head of Italy's financial markets watchdog Consob, said,
There are no similarities between Cyprus and Italy...The markets are obviously nervous [over Cyprus], but I wouldn't dramatise.

Several Spanish dailies ran with Cyprus as front page story today (see here). The most common reference in the Spanish press is to Argentina's corralito - when Argentinians' accounts were frozen to prevent a bank run in the country at the end of 2001.

As in Italy, there are no signs of Spanish depositors taking to the cash points - but the interest rate on Spain's ten-year bonds has reached above 5% this morning. As in Italy, authorities have moved quickly to reassure the citizens that there is no risk of contagion spreading to Spain.

There has been some concern over contagion in the press, though, with Carlos Segovia, Economics Editor of El Mundo, writing,
Analysts from around the world start to doubt that Cyprus’s precedent may one day end up being applicable to other Southern European countries, even partially.
Under the headline, "We are a German colony", the paper's Washington correspondent Pablo Pardo goes all out,
The 'bailout' imposed by the EU [on Cyprus] is the closest thing to an armed robbery against that country's savers.
Spanish economist José Carlos Díez is not happy either. He writes in El País,
The Cypriot bailout deal confirms that there are no signs of intelligent life in Europe.
Spanish business daily El Economista is a bit more relaxed, saying in an editorial that a Cypriot-style corralito is "unthinkable" in bigger eurozone countries like Spain, Portugal or Italy. But the paper also notes,
A haircut should have been applied to bondholders before applying [the deposit levy], which now comes out as an inconsistent measure.
So critical and concerned about precedent set, but no "panic spreads amongst savers" type headlines that we have seen in certain other countries. We certainly do not play down the precedent, or defend the deal, but one should not exaggerate either.

There's no way this [the deposit levy] will be repeated in Spain or Italy, so it's not clear when the great bank run is supposed to take place - not that bank runs are impossible by any stretch of the imagination in these economies, but a deposit tax or even the precedent set here is not likely to be the cause. That said, a real question remains over whether this will hamper future bailouts, future funding from the eurozone or even the fledgling moves towards greater eurozone integration. But that is a slightly different discussion.


Denis Cooper said...

I think that before you got to the point of large numbers of ordinary people queuing at ATMs to get some cash out while there was still time you'd have a much smaller number of people electronically transferring larger sums of money from their local accounts to their accounts in safer countries. Of course to do that quickly they'd have to be prepared with those foreign accounts already set up.

Jim said...

There is no immediate reason why people will be queuing at ATMs today in Spain. But it just shows everyone that savings are no longer safe when bailouts are being discussed by their politicians. They were lied to by their politicians in Cyprus, after all. So I'd expect anyone who can to move their money into a safer form as prevention. So a drawn out draining of capital rather than a bank run.

BlackBob said...

And when the Spanish and Italians see what happens when Cypriot banks reopen? When the bank run really starts?

It's madness to start a bank run but rational to join one.

Anonymous said...

Its a holiday where I live in Spain so the banks were shut for today and tomorrow. However, Sunday I emptied half my current account and today another quarter but no evidence of a run. On Wednesday I'll be cashing in my modest savings as they aren't giving me any interest of note. Its just a precautionary measure but I don't trust banks and I don't trust governments especially after recent events.

Stephen said...

It's all well and good that Italy and Spain aren't (over)reacting today, but the seizure of 9.9% of Russian billionaires' accounts in Cyprus will likely see a rather strong backlash in Moscow. If Putin acts true to form, seizure of EU nation's accounts and levies to repay the billionaires therefrom is not a completely outlandish prediction.

jon livesey said...

"There's no way this will be repeated in Spain or Italy, so it's not clear when the great bank run is supposed to take place."

I am not sure if you are joking here, but the answer if pretty clear. Bank runs will happen - in Spain, for example - when Spain's Banks look as weak as those of Cyprus.

When will that happen? It will happen when Spanish house prices fall as much as Irish ones have fallen, and when all the Spanish developer loans that are going to default do default.

At that point, Spain will be forced to line up for a bailout, and at that time people will remember what happened in Cyprus, and act accordingly.

And all the elegant sarcasm in the World won't stop it.

Open Europe blog team said...

@jon livesey

Thanks for the comment. Just to point out (as we have updated in the text) we do not believe the deposit levy will be repeated in Spain or Italy - we were not referring to the possibility of a bank run. We completely agree that bank runs remain a possibility in struggling countries such as these two. It would take something significant to cause them but with Spain's shaky banking system you are correct to point out that it is not impossible. It will of course depend on a number of issues, not least the role of the ECB and other eurozone countries.

Rik said...

@OE and Jon.
Imho you cannot be that sure about that. For the following reasons:
-Probably Italy and Spain going for a bail out/rescue will be seen by many as the end of the line (last major rescue).
Which means there is a lot more room to do things. Unless Hollande keeps tanking France further of course.
-There is not enough money to rescue Spain and Italy extra funds have to be found somewhere. Very doubtful if it will be the Northern taxpayer.
-Average wealth per Italian is probably double that of that of the average German. Makes it nearly impossible to sell.
-Cutting bankaccounts is an ideal way to stop real contation (as opposite to contagion in confidence), the bug stops before the border with senior bonds that is not the case.
-Btw both countries need to do something on their bankingsector Spain a lot more than Italy. But neither one has the money for it.
Seen from that angle it might be something to consider at least.
More likely is a bail in PSI of bondholders like in Greece imho. Only as it is shown there the bankingsector and the government are via armtwisting so linked that cuts or recaps end up on the government's BS one way or another. And subsequently will require a PSI there at one point in time (probably earlier) and likely an OSI as well.
Looks nearly certain that we will end up with 150ish or something like that debts which are clearly unsustainable.
Donot see the IMF accepting that anymore as well. They run into the Greek trap but that was likely the last one.

In that situation it is more logical to tax the locals next to senior bondholders (junior will likley be wiped out (If Holland does that at home forget that they will agree to keep them alive in Spain (politically unsaleble). (also according to MMT (where it is more or less an assumption) of which I am not a real big fan btw).

Re bankruns. It is hard to see how anybody can keep lots of savings with a Spanish or Italian bank. There is simply a lot of downside risk and very little or no upside.
Any sensibel person should bring savings (not workingcapital) outside the country.
However a lot of them didnot do it before and the situation wasnot much better. So it looks like most will blow over.
However I expect multinationals as far as they donot already go Greek andkeep as much as possible out. Would be terrible PR if they got caught in a Cyprus, their CFO would look like a complete idiot, relying upon politician's promises.

Rollo said...

If you had a Euro deposit saved in a Spanish, Portuguese, Greek, Italian bank, would you leave it there? Or would you open an account in Germany or Luxembourg or Finland and move it there? I would.

Rodney Atkinson said...

Even more important is how Dimitry Medvedev the Russian Prime Minister has compared the European Union's actions to what used to happen under the old Soviet Communism. "This practice, unfortunately, was very well known and is familiar to many Russians from the Soviet period, when money was exchanged with coefficients and never returned. But Cyprus is a country with a market economy, a member of the European Union. The move "looks just like confiscation of people' money."
Another great triumph for the decadent EU - to be compared with Soviet Communism - and by those who suffered under it!

IDRIS said...

It must be at least 6 months ago that I read of major international companies moving all but working capital out of euro banks. Indeed, those in charge of such companies are (a) by defintion, not thick and (b) under a fiducary duty to their shareholders to avoid the sort of risk that is now evident.

Charles Fitzhugh said...

The worlwide asset declaration dictate joined at the hip with the equaly bizarre anti fraud laws just introduced in Spain may cost,at least the expat community, more than those holding accounts Cyprus must surrender for the joys of living in the Club Med zone. The Spaniards with assets outside Spain for their part are totally ignoring the complex demands for sensitive personal data, in conflict with EU norms to be revealed to the Finance Ministy's tax and money grabbers,just as they ignored the recent "come clean" amnesty. Interesting that the region and city with almost the lowest credit ratings in Spain are this evening about to burn, literally, in the name of culture some €10-15 million in the form of the noisy and polluting Valencia fallas which started not solong ago as a routine spring time house cleaning.

Unknown said...

Franz Joseph was well & truly deceased before the rest of the world woke up to the implications of his assassination. Most, except we who keep up on such things, are not aware of where Cyprus is let alone the policies that will exacerbate this crisis. Initial reaction will be from the informed but it will be some time before the average man on the street realizes what's happening.

jon livesey said...

"Franz Joseph was well & truly deceased before the rest of the world woke up to the implications of his assassination."

Not that it's important, but it was Franz Ferdinand that was assassinated. Franz Joseph died in 1916 at the age of 86.