The widely read American financial expert John Mauldin (www.mauldineconomics.com) made the following summary of Cyprus, the Euro, European banks, etc. in his latest newsletter. It has got to be one of the best pieces I have read so far!
You
Can’t Be Serious
By John Mauldin | Mar 27,
2013
You Can’t Be Serious
The Serious Unintended Consequences
It Is Time to Break Up the Banks
New York, Singapore, and the SIC Conference in California
The Serious Unintended Consequences
It Is Time to Break Up the Banks
New York, Singapore, and the SIC Conference in California
I
admit to being surprised by Cyprus. Oh, not the banking crisis or the sovereign
debt crisis or the fact that its banks were eight times larger than the country
itself or even the fact that the banks were bloated with Greek debt that had
been written down. I wrote about all that a long time ago. What surprised me
was that all the above was apparently a surprise to European leaders.
While
there is much to not like about what European leaders have done since the onset
of their crisis some five years ago, they have demonstrated a prodigious
ability to kick, poke, and massage the can down the road, to defuse crisis
after crisis, and to indefinitely postpone the inevitable. They have
demonstrated a remarkable ability to spend taxpayers’ and others’ money in order
to keep Europe and the euro more or less in one piece. At every step they have
been keenly intent on maintaining trust in the system. That they have been
successful in keeping a majority of citizens in favor of the Eurozone and the
euro, even in countries forced to endure serious austerity, must be recognized.
However, the shock in Cyprus reveals
an absolute lack of preparedness in dealing with a problem that had festered
for several years. By now it should be no surprise to anyone that sovereign
nations can default, that banks can go bankrupt under the weight of defaulted
sovereign debt, and that banks can be too large for some countries to bail out.
That a clear and consistent response to Cyprus should have been worked out in
the halls of Brussels and the ECB seems so, well, reasonable. Clearly, the
large depositors in Cypriot banks, the majority of whom were Russian (according
to Financial Times
reports) thought the Eurozone had a plan. In fact, the apparent assumption,
bordering on religious faith, that Eurozone leaders would not allow depositors
in Cypriot banks to lose one euro, is almost touching. This snafu is going to
have repercussions that spread far beyond this tiny island nation. Let’s look
at a few of the implications.
When
we woke up to the Eurozone pronouncement that all depositors in Cypriot banks,
no matter the size of their deposits, would take a loss my reaction was
somewhat akin to John McEnroe shouting, “You
can’t be serious!” to a line judge whose call he infamously questioned.
While
there was no official deposit guarantee in place in Europe, the implicit
guarantee was €100,000, a number that had become all but sacred during the
recent banking crisis. To wake up and find that European leaders not only did
not consider this protection to be implicit but also planned to demand losses
from all depositors, was quite the shock. I think this may have been the single
worst “call” by European leaders since the beginning of the crisis in 2008.
Let’s
look first at what actually transpired. Cypriot banks held deposits of roughly
€68 billion, four times the size of the total national GDP, while the total
size of the banks was roughly eight times GDP. The “Troika” seemed to feel that
Cyprus needed €17 billion in bailout money to be able to handle the crisis. But
after finding hundreds of billions for Greece and Spain, they were only able to
offer tiny Cyprus €10 billion (€10 billion is the equivalent of offering the US
$8 trillion, give or take a few euros, just to keep it in perspective), and
demanded that depositors in Cypriot banks be levied for most of the remaining
€7 billion. They offered a formula by which small depositors would lose
somewhat less than 10% and large depositors somewhat more (the actual number
varied day by day).
The
Cypriot parliament totally rejected the Eurozone proposal. Not one vote was
cast for the deal. And when you look at the numbers, as any politician does,
you can see why. This is an island of 1.1 million men, women, and children.
There are (were) 370,000 bank accounts, with 360,000 of those containing fewer
than 100,000 euros (per Dennis Gartman). In the recent presidential elections
in Cyprus, there were 445,009 voters and a voter turn-out rate of 81%. Thus, a
huge majority of voters had accounts with less than €100,000 in them. Call me
cynical, but I think any politician could figure out which side of this fence
to land on.
It
now appears that “only” €5.8 billion is needed for the bailout, so the 10,000
or so accounts holding more than €100,000 will be docked an average of
€580,000. “The tottering banks hold 68 billion euros ($88 billion) in deposits,
including 38 billion ($49 billion) in accounts of more than 100,000 euros –
enormous sums for an island of 1.1 million people, which could never sustain
such a big financial system on its own.” (NBC World News).
On
the surface it looks like large depositors will lose about 15%. And if the Financial Times is right
(and the betting line is heavily on their side), a significant majority of that
money is Russian. Much of the remainder is tax-haven money (more on that
later). “Not so bad,” you might think; “things could be worse.”
Well,
actually they are worse. Some EZ officials suggest that the losses of large
depositors could range up to 40%, and the Cypriots themselves suggest 30%. That
is because if you are a Greek bank with a Cyprus branch your deposits are
exempt from the levy. The logic behind that decision is just too arcane to
explain in a brief letter that prides itself on rational explanations. Which is
another way of saying that I actually couldn’t understand it myself. But then,
I’m just a country boy from West Texas, not a European financial wizard.
Things
keep spiraling down in the Eurozone. One of the founding principles of the
Eurozone was that a euro anywhere within the zone would be as good as one
anywhere else. Euros would flow freely. All for one and one for all.
Except
that now euros in Cypriot banks are no longer equal. Not only are they going to
be “taxed” (or whatever euphemism they end up choosing – they’re still debating
that one – but if it were your account you might call it theft), but deposits
will be subject to capital controls. Reports coming out of Europe this morning
suggest that banks in Cyprus will stay closed until at least Thursday. It is
not clear when you will actually be able to take your money and leave the sunny
shores of Cyprus.
Cypriot banks will remain closed until Thursday, the
government announced on Monday night, as President Nicos Anastasiades
acknowledged that the country had come “a breath away from economic collapse”
before its last-minute bailout. Speaking after he agreed a €10bn
international rescue that includes the restructuring of the island’s two
biggest lenders with losses for bigger depositors, Mr Anastasiades also said
capital controls would be imposed but as a “very temporary measure that will be
gradually relaxed”.
We
will eventually learn what time frame a Cypriot politician has in mind when he
says “temporary.” And Mr. Anastasiades may have been speaking optimistically to
the press. Other Cypriot politicians were rather less sanguine. From Dennis
Gartman this morning:
They (bank depositors) knew for certain, however, that
they were going toface massive losses when Mr. Averof Neofytou, the deputy
president of the ruling Disy Party, said that those large depositors “Will
[have to] wait for many years before they see what percentage they will get
back from their savings – 30 percent, 40 percent, 50 percent, 60 percent, it
will be seen….”
Basel
III standards require European banks to increase their deposit ratios. This
European response to Cyprus is going to make that harder for banks in smaller
European countries to accomplish. Very tiny Luxembourg has banking assets 13
times the country’s GDP. Yes, I know that Luxembourg’s banks are the very
epitome of solid banking and that the majority of those assets are loans to
central banks and other credit institutions, but there is no way on God’s green
earth that Luxembourg as a country could even begin to think about backing its
banks. Of course, everyone knew that before this crisis, but if you are the
treasurer of a large corporation, how soundly do you sleep at night after
Cyprus? And God forbid you have an account in one of the peripheral countries.
In the case of Ireland, the lesson was that the money would be found to back
the banks, even if taxpayers suffered. But now? New rules for new times. And
then you open The Financial
Tim es this weekend and read (emphasis mine):
The chairman of the group of eurozone finance ministers warned
that the bailout marked a watershed in how the eurozone dealt with failing
banks, with European leaders now committed to “pushing back the risks” of paying for bank bailouts
from taxpayers to private investors.
Jeroen Dijsselbloem, president of the eurogroup, was
speaking after Cyprus reached its 11th-hour bailout deal with international
lenders that avoids a controversial levy on bank accounts but will force large losses on big deposits in
the island’s top two lenders.
Evidently,
Jeroen interprets the term private
investors to mean depositors with over €100,000 in a bank. That has
to be unsettling to anybody who has diligently saved for decades and is now
retired and depending on those funds for sustenance. And for corporations that
run a payroll account through a bank? The thought that you could see a lifetime
of work building a business go down in an unelected bureaucrat’s blink of an
eye would keep me up at night. I do not think most corporate financial types
see their deposits as an “investment” in the bank.
One
of my favorite reads is Kiron Sarkar (who variously lives and writes daily in
London, Ireland, and India). I talk and correspond frequently with Kiron. He is
a retired but very
senior investment banker with deep European political and business connections
in many countries. As we say in Texas, he is “wired.” (You can subscribe to his
letter at http://sarkargm.com.)
He shot out a special note on the rather incendiary comments of Mr.
Dijsselbloem. I have seen other comments similar to these (but less well-said),
expressing various levels of disbelief about the timing of Dijsselbloem’s
remarks, but here’s what Kiron had to say:
Reuters quotes the Chairman of the EZ Finance Ministers,
Mr Dijsselbloem, as having said:
“If there is a risk in a bank, our first question should
be OK, what are you in the bank going to do about that? What can you do to
recapitalise yourself? If you can’t do it, then we will talk to the
shareholders and the bondholders, we’ll ask them to contribute in
recapitalising the bank and, if necessary, the uninsured deposit holders.”
He is also reported as having said, “It will force all
financial institutions, as well as investors, to think about the risks they are
taking on because they will now have to realise that it may also hurt them. The
risks might come towards them”. These are very likely to be personal remarks,
rather than an EZ finance minister’s policy statement, but these comments
suggest:
·
Uninsured depositors in EZ countries
may well be bailed in in the future, ie Cyprus is a precedent;
·
EZ countries with large banking
sectors will have to reduce their size and restructure;
·
EZ countries are seeking to shift
risks away from the public sector and onto the banks; and
·
Bail-ins will reduce the need to use
the ESM funds to recap banks, a policy which was proposed just under 1 year
ago.
These are INCENDIARY remarks, especially given the timing and
debacle over Cyprus. What happens to Malta? Slovenia is in trouble.
Luxembourg has a massive banking sector, though it is an AAA-rated country. All
3 are in the EZ. I realize that Mr. Dijsselbloem is new to the job and has
little to no experience of the financial services sector (why was he appointed,
you may well ask), but to make such comments, especially at this time, is the
height of irresponsibility. The comments Reuters reports seem accurate, as the
FT carries similar quotes.
At the end of the day, Mr Dijsselbloem
is, of course, right; but to say something like this, especially at this time,
well …
[Now
this is the key paragraph and takeaway. Read twice. – John]
Essentially, why will anyone keep more than E100k in any
EZ bank – indeed, why deposit any amount in certain EZ banks, as the value of
the EZ bank-deposit guarantee is worthless in a number of cases, as a
number of the peripheral EZ countries can’t afford to pay up. I repeat, the EZ
bank deposit “guarantee” is not a joint and several responsibility across the
EZ; it is the responsibility of individual EZ countries.
If these comments are not withdrawn/clarified, the weaker
EZ banks in the troubled countries, in particular, are going to come under
severe pressure. Even if withdrawn/clarified, this is yet another self-inflicted
wound. The euro has declined materially since these statements by Mr
Dijsselbloem were published by Reuters and the FT.
The euro has declined to US$1.2873 at present and
continues to weaken. The European banking sector is being hit – no surprise.
The peripheral countries (Spain and Italy) are also being hit, in particular.
Bond yields of the safer countries are declining, unsurprisingly, whilst the
yields in the EZ peripherals are rising. Italy and Spain look to be under
pressure. A number of
you may now understand why I am so negative on the EZ.
As
I noted, Basel III makes it more necessary than ever for Eurozone banks to
retain depositors, but this action on Cyprus will make getting large deposits
more difficult for many banks. Note that less than 4% of depositors account for
almost 60% of the deposits in Cypriot banks. Banks need those large depositors
if they are going to grow their capital base to the required standards.
This
unfortunate business underscores one of the most significant problems in the
Eurozone, which is the lack of a collective deposit-insurance scheme. I wrote
pessimistically about that topic over a year ago when European leaders promised
they would create a Eurozone-wide deposit-insurance mechanism. That initiative
has gone nowhere, primarily because the Germans have opposed it. (Ironically,
so did Cyprus.)
Let
me state this very clearly: if something as seemingly straightforward and
necessary as deposit insurance cannot be achieved, then how can there be any
hope for deeper fiscal union? And fiscal union will be necessary before all is
said and done if the Eurozone is to survive.
It
is not just tiny Cyprus or even Spanish banks that will be looked at with
growing worry by large depositors. Let’s examine this note from David Stockman
on European banking, and in particular French banks:
BNP-Paribas is the classic example: $2.5 trillion of
asset footings vs. $80 billion of tangible common equity (TCE) or 31X leverage;
it has only $730 billion of deposits or just 29% of its asset footings compared
to about 50% at big U.S. banks like JPM; is teetering on $500 billion of mostly
unsecured long-term debt that will have to be rolled at higher and higher
rates; and all the rest of its funding is from the wholesale money market ,
which is fast drying up, and from repo where it is obviously running out of
collateral.
Looked at another way, the three big French banks have
combined footings of about $6 trillion compared to France’s GDP of $2.2
trillion. So the Big Three French banks are 3X their dirigisme-ridden GDP… By
contrast, the top three U.S. banks which are no paragon of financial virtue –
JPM, BAC, and C – have combined footings of $6 trillion or 40% of GDP.
The French equivalent of that number would be $45 trillion for the U.S. banks.
Can you say train wreck!
It is only a matter of time before these French and other
European banks, which are stuffed with sovereign debt backed by no capital due
to the zero risk weighting of the Basel lunacy, topple into the abyss of the
shadow banking system where they have funded their elephantine balance sheets.
And that includes Germany, too. The German banks are as bad or worse than the
French. Did you know that Deutsche Bank is levered 60:1 on a TCE/assets basis,
and that its Basel “risk-weighted” assets are only $450 billion, but actual
balance sheet assets are $3 trillion? In other words, due to the Basel
standards, which count sovereign and other AAA assets as risk free, DB has $2.5
trillion of assets with zero capital backing!
This is all a product of the deformation of central
banking and monetary policy over the last four decades and the destruction of
honest capital markets by the monetary central planners who run the printing
presses. Furthermore, this has fostered monumental fiscal profligacy among
politicians who have been told for years now that the carry cost of public debt
is negligible and that there would always be a central bank bid for government
paper. Perhaps we are now hearing the sound of some chickens coming home to
roost.
Yes,
yes, I know: “John, how can you even think that French debt could be at risk?”
But if you look at France’s income and balance-sheet statements, as if France
were a stock rather than a country, you might not be so sure. Might I suggest
that a good trade would be to be long German government debt, short French
debt? Essentially, this is a bet that France will be worse off than Germany in
the coming years, which seems like a good wager right now. And in a French debt
crisis (well within the realm of possibility) that trade could work both ways!
Just saying …
We
will wrap up with this note that just hit my inbox from Louis Gave. (I am up
late, as usual, and Louis writes from Hong Kong, where it is early). Remember
that Louis is French as you read this.
So we now know that, in Europe, big depositors are the
first in the line of fire to ensure that small depositors do not suffer losses.
Needless to say, this raises the question of who wants to be a big depositor in
a weak bank in a country undergoing a secondary depression?...
EU policymakers are probably not evil henchmen set on
destroying the financial industry (even if it often looks that way from the
City of London). The more likely explanation is that EU policymakers are simply
ignorant of how financial markets work. For example, the fact that the two
largest Cypriot banks’ London branches have remained opened through the past
week, allowing large depositors to take out millions of euros, hints that
Europe's policymakers are simply clueless when it comes to how financial
markets work. This also means that whatever pound of flesh the EU thinks it
will be getting by wiping out the large depositors could turn out to be on the
light side.
Or, for a second example of cluelessness, what could
rival yesterday's declarations by the Dutch finance minister that the Cyprus
bailout set a new “template” on how to deal with bust banks, namely make the
rich depositors pay for the little depositors? What large depositor in a
troubled bank in a country going through a secondary depression will want to
stick around for that deal? We would venture that the next time that
"solution" is applied, the eurocrats will find that the large
depositors will not have waited around to get fleeced. In fact, as mentioned
above, it might not even work this time (i.e., Cyprus), let alone the next one.
Going one step beyond the ignorance of how financial
markets work, what seems profoundly shocking is the lack of recognition of this
ignorance. Place yourself back in the fall of 2008. As the financial crisis was
unfolding, the likes of John Mack, Jamie Dimon, John Thane and other banking
heads were asked to meet at the New York Fed, the US Treasury or even the US
Congress on a regular basis to explain what was unfolding (and what they
planned to do about it). Meanwhile, how many times have the heads of Santander,
Intesa, SocGen, Deutsche Bank, etc., been called in to explain what was going
on, or for them to give their views on what should be done? If asked, perhaps
these CEOs would have said that:
a) European banks are much more dependent on deposits
than their US counterparts.
b) Owners of large deposits are likely to be more risk
averse and much more active in moving their money than small retail savers (for
whom moving money from one country to the next presents high costs and almost
insurmountable hurdles). And this for obvious reasons: a 40% haircut on $1,000
is unpleasant but it's not going to change anyone's life. But a 40% haircut on
a pensioner's life savings of $500,000 will have a huge impact—and a 40%
haircut on any middle-sized company's $10mn payroll will be enough to bankrupt
the business. In fact, this simple reality brings us back to Mark Twain's
advice that it is always better to tax poor people as there are so much more of
them—unfortunately, Europe keeps going the other way, with devastating
consequences.
c) For these reasons, regulators and governments have
never in living memory allowed big banks to default on their depositors,
regardless of the wording of formal deposit insurance contracts. If this
implicit guarantee is now removed in Europe (and it sure looks like it has
been), then we should expect a big shift of large deposits out of the banks and
into government bonds or credit market instruments.
d) This will prove very problematic, especially given the
new Basel III regulations which encouraged a funding model whereby banks should
rely more on deposits and less on bonds.
e) As savings shift out of banks and into credit markets,
the "German bank" model based on bank-financing of industrial
companies and long-term creditor-debtor relationships will inevitably erode, to
be replaced by the Anglo-Saxon model credit-market financing along with the
short-termism which it implies.
In other words, the law of unintended consequences is at
work: the eurocrats will end up with exactly the opposite of the financial
system they wanted. Either that, or the European banks will end up having to be
nationalized in great numbers. These two possible outcomes seem to be the
logical consequence of the EU's very unfriendly financial sector policies.
Louis
is right. If you are a large depositor, you HAVE to be thinking about what
country your deposits are in and how safe the actual bank is. Even if a bank is
seemingly safe, is that any comfort? Is there any evidence that the depositors
in Cyprus are better off being in one bank than another when the entire
country’s banking system has seemingly failed? Was every bank in Cyprus bankrupt at the same
percentage rate? Who’s to say, if BNP Paribas has problems, that a few finance
ministers in Brussels would not demand that Societe Generale and Credit
Agricole should be penalized, since they are in the same country? What is the
logic here? Or is Cyprus a one-off because most of the losses are Russian and
who really cares about those commies anyway? Except that the next time,
comrade, it might be your bank account that is deemed expendable.
If
you run a family office, large corporation, or just your own small pension
account, you are not exercising reasonable prudence if you are not asking
yourself, what are the risks as of today? You’re calling European friends and
trying to figure out what the new rules are. Who made these decisions and why?
After
spending hundreds of billions and not flinching from potentially printing
perhaps trillions of euros to shore up the periphery, the Eurozone leaders now
balk at a mere €5.8 billion and raise questions about their whole enterprise?
Over German politics? You can’t be serious.
This
may one day rank up there with “Let them eat cake” in the politically tone-deaf
department. Merkel may have risked the entire euro experiment over local
politics, after writing such large checks in prior situations. The Eurozone
response to Cyprus indicates serious ignorance of how financial systems
operate. Trust is an ephemeral thing. It is hard to build and maintain and can
be so easily squandered. I suggest you go back and read (if you have not) the
recent posting in Outside
the Box of Dylan Grice’s masterful essay
on trust.
Last-second insert, which I haven’t done in years, but
this seems important:
As
my editors and tech staff are literally ready to send this letter out, reports
are starting to come across my desk that Russian depositors are finding ways to
get money out of Cyprus, through branch banks in other countries. The ECB has
supposedly told Latvia not to take Russian-flight money if they expect to join
the Eurozone. Haircut estimates are ranging to 50%. If a lot of Russian money
actually goes, it could be closer to 100%. I offer a few links, one
from Reuters and one
from ZeroHedge. I see some other reports and can’t completely separate
rumor from fact, but Reuters is usually reliable and has a policy of multiple
sources.
No one knows exactly how much money has left Cyprus'
banks, or where it has gone. The two banks at the centre of the crisis – Cyprus
Popular Bank, also known as Laiki, and Bank of Cyprus – have units in London
which remained open throughout the week and placed no limits on withdrawals.
Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no
restrictions on withdrawals in Russia. Russians were among Cypriot banks'
largest depositors. (Reuters)
So, while one could not withdraw from Bank of Cyprus or
Laiki, one could withdraw without limitation from subsidiary and OpCo banks,
and other affiliates? Just brilliant. (Zero Hedge, citing the above Reuters
quote)
If
this is true (and Reuters makes it sound real), so much for sticking it to the
Russians. This could escalate into something ugly. I rather think this
weekend’s Outside the Box
will be on this still-brewing crisis. The Europeans are looking more and more
like the Keystone Cops, in addition to being merely clueless. (And watching
Jeroen Dijsselbloem trying to take back his words at this late moment is
amusing. The Dutch are normally so disciplined. It just gets stranger, and if
it was not so sad and scary it would be funny.)
The
problem we have been discussing is not just a problem in Europe. In a general
sense, it is the problem of banks that are too big to be allowed to fail. It is
time to rein in the size of large banks before the next crisis. BAC and C are
not just too big to fail, they are too big to effectively manage. If banks want
to get larger, they should pay more deposit insurance to offset the implicit
guarantees they get from taxpayers to cover losses beyond the ability of an
FDIC to underwrite. I would go so far as to increase the capital requirements
of banks as they increase in size, giving an incentive for management to break
them up into smaller (and more manageable) pieces. The number of top experts,
economists, and bankers who agree with me is rising, as this
recent post from my friend Barry Ritholtz over at The Big Picture
demonstrates.
End of newsletter
End of newsletter
a very good read. And chimes pretty much with http://pawelmorski.wordpress.com/2013/03/27/europe-no-need-to-worry-the-fires-downstairs/ which offers figures that buttress it.
ReplyDeleteThe really scary thing, for me, is the level of financial illiteracy in the voting population. On german boards, people say things like: "cypriot banks offered 4.5% interest on deposits? But that's insane, no wonder they went bust! That's a ponzi scheme. That must have been what Schäuble meant"
No, actually, those deposit insurance rates ARE the impact of the crisis. They have to offer those levels, to keep their depositors sweet. And european banks are, in fact, supposed to be increasing their reliance on depositor finance, not reducing it.
I'm not actually that financially literate myself (my knowledge has just been picked up over the past years in a crisis-driven approach). But that level of ignorance, and the fact that it drives voting behaviour, and thus government behaviour is very scary to me.
Normally, it wouldn't matter. In a common currency, with national fiscal policies, it does.
I note that Barry Ritholtz's list of eminences calling for the breaking up of the TBTF banks does not include anyone from the Eurozone in fact the only EU representation is from the BoE.
ReplyDeleteThe Eurogroup would rather have smaller banks and less of them - preferably one bank per country!
BTW I wrote to the Greek government Management Organisation Unit {MOU) asking if they could tell me what the status of the Neo Ikonio rail link to the port of Piraeus was. My understanding is that the MOU is responsible for coordinating EU Cohesion and Structural fund projects.
I received an answer referring me this page at Ergose (which is the authority in charge of railway construction), it indicates that the rail link was finished in Dec last year - the project was started in 2000. So it was on foot long before the COSCO deal came into being «sigh»
I have written to Ergose asking if they can confirm the line is finished... and if they tell me when the first container train will run.
I am half surprised that that I even got an answer, even more that it was in English pointing me to the web page, which is also in English.
Hats off to the MOU person who took the trouble to reply to my email, unfortunately they did not give their name. And hats off to the Greek government/public servants for making so many of their web sites available in English.
CK
Frightening stuff.
ReplyDelete" Mr. Dijsselbloem is new to the job and has little to no experience of the financial services sector (why was he appointed, you may well ask)"
ReplyDeleteHe was appointed, because unfit for the job, but Germany for image purposes couldn't push a german at his place. In Greece they are called "useful idiots". Unless it was the powerful greek lobby to push him into position. :)
But why is everyone shooting at the messenger? What he said is in perfect accordance to what Schauble said:
"He states that anyone investing their money in countries with low taxes or less control is exposed to the risk that the bank institutions might not be viable."
http://ruincy.com/the-german-minister-of-finance-scauble-is-being-very-provocative/
1+1=2 Of course, they could be more clear and say:
"Dear southerner depositors. If you don't want to loose your money, bring them to german banks. You may get lower interest, but we won't decide a haircut on our own banks".
But that would sound too bullish, wouldn't it. Still, the press of the south is picking up the signals and it is encouraging.
As for the size of individual banks, it is not a problem. The only real (new) rule, is that your banks must be 3,5:1 to your GDP max. If your banks have 40:1 leverage, it is not an issue. At least, until a new Merkelian decree changes the rules. A new bank Yalta designed.
All it will take is a spark, one country of the south that will say "enough" and show the others that leaving the euro is possible and finding prosperity outside it is also possible. Then, the rest will follow... In Cyprus already everyone talks about seeing how to disengage from the troika as soon as possible and seeing after stabilization, what they have to do leave the euro. In Greece the discussion will open soon enough, when the goverment will need to take new cuts. The people have had enough of the "medicine".
I take a bit of a contrary view regarding the size of banks. I think of primary importance is the size of the individual bank. And by 'size' I don't mean the Basel-2 capital adequacy ratio but, instead, the total leverage of a bank (I have written about that at length before). If JP Morgan and Citibank get by with a leverage of about 10:1, why whould large European banks have that much more. After all, JP Morgan and Citibank are not known to be small kids on the block.
DeleteIf a country's banking sector is 'oversized' in sum but all the individual parts are adequately sized, I wouldn't be so worried. After all, an 'adequately sized bank' will be much more resistant to a crisis.
Mr. Kastner, my comment was sarcastic. The size of any sector of an economy, is proportional to the demand of the service provided. Being computer chip manufacturing or ship building or banking. However, we see now new "Merkelomics", were the size of a sector is acceptable by ratios designed by the german goverment.
DeleteI have just looked at the financial statements of Laiki. Per Y/E 2010, their leverage was just under 12:1. During 2011, the had to make major write-downs which reduced their equity to 601 MEUR and raised leverage to 56:1 per Y/E 2011. No financial statements since then in the internet.
DeleteLoans alone were about 25 BEUR at Y/E 2011. Thus, anyone knew at that time that if only their loans (they had other risk assets in addition to loans) had to be written down by 2,4%, their equity would be entirely wiped out. Could anyone have predicted, in early 2012 when Greece was toying with Grexit, that a Cypriot bank which had a heavy engagement in Greece might have to write down its loans by 2,5%? More likely by 5-10%.
The balance sheet at Y/E 2011 showed quite clearly that Laiki was like the Titanic after hitting the Iceberg. To stay afloat, they had to draw down interbank liquity by about 4 BEUR and reduce total assets by about 10 BEUR(almost one-third of the total size of the bank).
One really has to wonder what bank management, Cypriot regulators and EU supervisors did since Y/E 2011!
Incidentally, already during 2011, deposits had declined from 25 BEUR to 20 BEUR.