Cyprus and Horrible Decisions

Cyprus has a deposit protection scheme any other EU country. It protects deposits up to 100,000 €. Such a scheme is in place to avoid bank runs. People fearing that they could loose money will try to get all of it out of banks and hide it under their mattress. Today it was decided, that to "save" Cyprus it's best to show that such a scheme isn't worth the paper it is written on (or the energy it takes to download it).

According to bloomberg deposits under this freshhold will be taxed with 6.75 % deposits above that with 9.9 % to finance the bail out. This decision is just another in a never ending stream of bad decisions that is dragging the EU downhill. But this might just be a breaking point because it shows to the citizens of the other countries having trouble that in order to save their deposits they need to get them out of their countries. Germany is save, so I expect an ever growing money inflow from Spain Portugal and Greece.

Today bank runs can be rather quiet. It wasn't in Cyprus though where people tried frantically to save their money. It will be and was in Greece. With opening a deposit in another European country or even Switzerland for that matter loosing up to 10 % can be avoided. This can today be done online no more lines infront of banks. It can also be better organized. Just tell your 400 Facebook "friends" that you have opened a deposit with Deutsche Bank (actually it would be better to say you have undertaken measures to save your money) and within minutes your's and other people's message will spread to most of the country.

Here is what I think will more likely than not happen: a bank run in Cyprus cannot is unlikely to be avoided anymore. It will start once the banks reopen on Wednesday and most of it will be silent from home offices. Before the authorities know the banks might have lost so much liquidity that the next bailout is just around the corner. Also I expect the panic to spread to Greece, while the citizens of other Portugal and Spain will become quite uneasy.

tl;dr: A haircut for depositors under the 100,000 € freshhold was an all around horrible decision which will probably cause a bank run in Cyprus that might just spread to Greece.