March 18, 2013
The Cyprus bailout deal has a lot of people scratching their heads over what EU leaders were thinking when they came up with it.
As part of a plan to rescue Cypriot banks, deposit-holders in those banks will be subjected to an immediate expropriation of a certain percentage of their savings accounts, the exact amount of which is still being worked out. (Initially, it was 6.5 percent on balances below 100,000 euros and 9.9 percent on those above 100,000.) The government is framing this haircut on deposits as a “tax.”
Many market observers are worried about the precedent this sets. After all, what’s to stop EU leaders from deciding to do the same thing the next time a banking system in a bigger euro member state needs a bailout?
Those involved in crafting the deal have gone to great lengths to construe Cyprus as a “unique” case, owing to exceptional circumstances.
However, given the increasing trend toward private-sector involvement in bank bailouts in the euro zone and the relatively favorable situation that creates for a country’s government debt (as opposed to the approach wherein the sovereign foots the entire bill), depositors elsewhere in peripheral Europe may be less than convinced that it couldn’t happen again.
Morgan Stanley analysts Paolo Batori and Robert Tancsa explain in a note to clients, writing, “A successful implementation of this [deposit haircut] programme would certainly be positive for Cypriot government bonds, as the debt trajectory would peak significantly lower than was previously expected, minimizing the risks of any restructuring in the near term.”
Full story here.
This article was posted: Monday, March 18, 2013 at 6:30 am