Banking & Finance

Janney Outlines Possible Spillover from Cyprus

This morning we went on record calling the European proposal to make depositors face a Cyprus bailout tax on their bank deposits as being nothing short of theft. A levy, tax, fee, or any other government mandate seizing a portion of assets is theft. That being said, Janney Capital Markets has outlined its path of expectations of how this move could spill over into other nations and particularly mentions the PIIGS (Portugal, Italy, Ireland, Greece, Spain). Again, this is a possibility and a scenario of how this could come is what is addressed.

Janney’s Guy LeBas said:

The real problem with the Cypriot bank tax proposal is that it breaks an implicit covenant that depositors will not be subject to losses from bank failure. … The underlying purpose of said covenant is to prevent a run on the bank: if depositors are concerned about losses amidst a bank failure, they’ll withdraw cash and contribute to that very failure.

At issue is whether this forces depositors to put cash under the mattress rather than into the banking system. LeBas thinks the damage has been done for Cyprus. The risk is one for Greece, Portugal, Spain, and Italy. He then outlines the scary but not yet likely scenario.

LeBas’ case is if depositors in other nations fear a similar tax and begin withdrawing money. The implication is that bank runs could go viral and could leave a large hole in bank balance sheet in the nations which are already weak. He said:

Given the structure of the Euro currency, national governments don’t have the ability to print the Euros that could rescue a bank from such a run. As a result, the ECB is the only entity capable of printing the liquidity necessary for rescuing a bank-ran financial institution. It’s clear that the ECB will provide liquidity to the short-term government debt markets via the OMT, but their commitment to financial institution liquidity has been less evident, particularly in a situation where the ECB is lending into a bank with no collateral. The only option individual nations’ governments would have outside of the ECB lies in accepting risk to the financial system or converting to a new currency. Again, this is an extreme case scenario, but one within the realm of possibility.

So the big question to ask is how likely this is to spilling over elsewhere. Our own concern is that EU finance ministers seem to be under the impression that it is their God-given right to raise taxes and then to raise fees for certain types of transactions and to levy whatever mandates they choose to.

The European Union is not going to crumble nor will it falter if Cyprus is under its umbrella or not. But throw in Italy and Spain, and then throw in Greece, Portugal, Ireland, and some of the newer nation states. The European message is that this is not a policy and will not be duplicated, but that requires trust and trust for overlords governing and taxing from a foreign land is not a simple measure.

We do not want to make bold or ridiculous predictions based upon the Europeans stealing 6% or 9% or whatever it is out of Cypriot banking deposits will lead to another major reexamination of risk in the lands of the PIIGS. But we also want to make the reminder that the history books are littered full of revolutions, wars, and widespread subversion which have started after unjust seizure and taxation.