The Great European Bank Run that never was?

Journalists were descending on banks across Cyprus this morning to monitor whether Cypriot depositors would rush to withdraw their cash as the country’s banks opened after being closed for 10 days. So far, however, there have been virtually no dramatic scenes of desperate people flocking to ATM machines and banks. There’s a feeling of calm. Those who expected Northern Rock style scenes have been left disappointed. However,  a couple of points:

• First, there’s no hard data available yet for deposit withdrawals in March, so everything is based on anecdotal evidence. There have been numerous press reports speculating about withdrawals in the run up to the bailout and even while the banks have been closed. Unfortunately, these are unlikely to be confirmed or disproved for at least a month (when data is expected).
• Remember, there are limits on what people can withdraw and/or transfer electronically. People may not be too bothered about waiting at banks if they are subject to strict limits.
• Obviously, in this day and age, much banking is done electronically so the number of people at the actual bank branches may not reveal the true level of transactions taking place behind the scenes. This is particularly true for Cyprus given the high level of foreign depositors who would have to bank electronically.

In the meantime the latest data on deposits in Cyprus in February was released this morning. Total deposits fell from €68.4bn to €67.5bn – a 1.3% fall, but not exactly as disastrous as some may have expected.

At the same time, as we predicted, depositors elsewhere in Europe – in particular Spain and Italy – have so far shown zero inclination to see themselves as next in line. There has been, however, a drop in banks shares in the wake of comments by Eurogroup Chief Jeroen Dijsselbloem.

So not the big collapse of everything that some expected, but, the capital controls are likely to play a role in mitigating this. As we have pointed out, the real challenge comes when the Cypriot government looks to remove capital controls and once the data on electronic transactions out of Cyprus becomes clearer.

You want contagion…I’ll show you contagion…

Everyone, including us, has commented at some point this week about how calmly markets have reacted to the situation in Cyprus.

Cue Dutch Finance Minister Jeroen Dijsselbloem.

From his interview with Reuters:

"What we've done last night is what I call pushing back the risks…If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'… If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."

"If we want to have a healthy, sound financial sector, the only way is to say, 'Look, there where you take on the risks, you must deal with them, and if you can't deal with them, then you shouldn't have taken them on’”.

"The consequences may be that it's the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take."

"We should aim at a situation where we will never need to even consider direct recapitalisation…If we have even more instruments in terms of bail-in and how far we can go on bail-in, the need for direct recap will become smaller and smaller.”

"Now we're going down the bail-in track and I'm pretty confident that the markets will see this as a sensible, very concentrated and direct approach instead of a more general approach".

We’ve bolded the key quote. Essentially, he saying the Cyprus deal might be a template for other bank restructurings across the eurozone (although he seems to be trying to row back from this a bit).

Now, we’re not saying we disagree with his points and we certainly agree with the sentiment of his comments – banks should be able to shoulder their own risks and if they can’t they should have plans for winding down and deleveraging. This is why we’ve long argued for things such as living wills for banks.

Let’s be clear, banks should be responsible for their own risks. That said, if you go round telling markets all week that Cyprus is unique and specific and all year that a banking union is on its way with an ESM backed recap fund, they aren’t going to take kindly to abruptly finding out otherwise.

It all just seems a bit strange and a bit clumsy - to put it mildly. Sometimes for better or worse, markets need to be handled with kid gloves.

Contrary to his expectation that markets would see it as “sensible”, they have reacted wildly. Spanish and Italian stock markets have swung into negative territory after being up for the day, led by their banks taking a hammering, figures via @suanzes:

Ibex35: -2,68%. BBVA (3.97%), Bankinter (-4%), CaixaBank (-2,44%), Banco Popular (-4.147%), Sabadell (-3,83), Santander (-3,27%)

As we have said before, we never quite bought that Greece, Cyprus or anyone was entirely unique, though with Greece eurozone leaders definitely could have got away with it.

Where does this leave plans for banking union and eurozone integration? We’re hesitant to say tatters, but it’s not looking great.

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  

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.

Spain

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.