Berlin cannot convince markets it doesn’t love confiscating deposits

Meeting between the Russian government and the College of the EC. EU Commissioners Dacian Cioloş, Štefan Füle, Günther Oettinger, Maria Damanaki, Karel de Gucht Michel Barnier, Siim Kallas, José Manuel Barroso EC President, Antonio Tajani, Androulla Vassiliou, Janusz Lewandowski, Kristalina Georgieva, Johannes Hahn, Cecilia Malmström, Tonio Borg, Hugo Sobral, Deputy Head of Barroso cabinet and Luis Felipe Fernández de la Peña, Managing Director EEAS. (in the foreground, from left to right). Cyprus was the main issue in this meeting albeit not present in the agenda. 22/03/2013 (EC Audiovisual services).

Cyprus Popular Bank Pcl’s uninsured depositors, with account balances above the €100,000 benchmark, will suffer an almost total loss of their money. The haircut agreed between the Cypriot government and the Eurogroup may reach 80%, while the rest 20% will be returned after the liquidation of CPB’s assets, a procedure that may take years and probably will be paid in instalments. CPB is the second largest bank of the island. At the same time uninsured depositors at the largest Cypriot bank, the Bank of Cyprus, will lose anything around 40% on their balances and there will be restrictions on caching or exporting the rest. This information was conveyed by the most competent authority on the island, the governor of the Cyprus Central Bank, Panikos Demetriades.

Also yesterday Jeroen Dijsselbloem, the Dutch minister of Finance and President of Eurogroup came back to his Monday’s statement, insisting that the method used in Cyprus, with the uninsured deposit accounts balances being used to rescue the banks (bail-in), will act from now on as a guide in future similar occasions in Eurozone.  Dijsselbloem had said that last Monday 25 March. Less than ten hours later, early on Tuesday, he tried to retreat on his words about the bail-in and the confiscation of bank deposits becoming a standard Eurozone practice. He was forced to do this after his statement provoked a tsunami of reactions from EU governments and the European Central Bank. In any case yesterday he clarified that the deposits’ confiscation will be the case from now on, and citizens had better chose carefully their bank.

Confiscation lovers

It seems however that this was not his idea. Probably he had rushed to communicate it before other, more authoritative sources on the matter, had spoken about that. As a matter of fact after having left Dijsselbloem to ridicule himself by retreating on his words within ten hours, the European Commission said on Wednesday that the method used in Cyprus WILL become a Eurozone standard in future bank rescues.

Of course markets were not at all pleased yesterday with this and all European stock exchanges closed in the red. The euro also reached 1.28 with the dollar the lowest level for months. In any case it seems that the idea of using from now on uninsured deposits to save failed banks all over Eurozone, as it happened in Cyprus, belongs to Ollie Rehn. That is why the Brussels’s EU Commission came out in favour of it. However this was not a direct statement by Rehn, and was rather leaked than openly stated.

Of course, after all that noise, it was very interesting to hear what Berlin had to say about that. No German government official though came out until late on Wednesday, to comment on this burning issue. They left the issue hanging on the air. To use depositors’ money to save imprudent banks is not at all a small thing. It may derail the entire Eurozone banking system, even if the fathers of this idea planned it to discredit the financial system of certain Eurozone countries. In this line of theorising, the banking sector of the central EU countries, like Germany, France and Britain would be greatly favoured, if smaller financial centres like Cyprus and Luxembourg disappeared.

But such things do not work in one way. What if world markets and international investors think, that this method of the uninsured deposits confiscation to save imprudent banks, is used also in Germany? Who is to say that no German bank would ever go bankrupt? Incidentally investors know a lot more about the vulnerabilities of the German and the French banks, than the economic analysts and commentators.

Certainly the strong negative reaction of the markets to what the Dutch President of Eurogroup repeated yesterday, was not a favourable sign for the bank accounts confiscation loving politicians. As was noted above, after Dijsselbloem repeated on Wednesday, what he had said on Monday and had revoked on Tuesday the markets didn’t seem at all at ease.

Berlin is not convincing

Obviously the bank accounts confiscation is not a policy that can be easily absorbed by investors, despite if it is meant to discredit the financial system of the smaller EU countries and favour the financial sectors of the central Eurozone member states. This was probably the reason that Angela Merkel’s spokesman, Steffen Seibert, came out on Wednesday afternoon and took a distance from what Dijsselbloem and Brussels had supported. In short Seibert said that the haircut to be imposed on the deposits in the two largest Cypriot banks is an exceptional case and will not be repeated in any other Eurozone country. He added that this cannot constitute a standard policy measure to save a bank, and concluded that the Cyprus case is unique.

If the German government had stated that earlier in the week, before the Dutch President of the Eurogroup and the Brussels Commission had supported the bank account confiscation as a standard practice from now on, Berlin could have probably convinced the markets that truly the German government is decisively against it. Now however after two days of contradicting statements, is difficult to be sure about anything on this matter. World markets need time and paradigms to be convinced that uninsured deposits in Eurozone banks are absolutely safe. Markets continued their downwards even after Seibert made his statement.

All in all it seems that Berlin is trying now to discover how Germany can play around with world markets. Obviously this country is jealous watching others make easy money in the financial sector. Germany wants a piece of the cake but it doesn’t know how to ask for it. Of course it cannot ask a chunk from London, New York or Paris. Then it has to be poor Cyprus and wealthy Luxembourg.