BANKING
Lesson 2:
Secured
depositors
Secured depositors – that is depositors with €100,000
and less – seem to be secured. That was proven by the second
Eurogroup decision on Cyprus (25 March) since the first decision imposed haircuts on all depositors in all Cyprus banks.
The security of small depositors continues to be an imperative
demand on behalf of European citizens and the European
Parliament.
It now seems that everything possible will be done by the
EU countries to keep insured deposits intact. But as German
Finance Minister Wolfgang Schäuble pointed out, a deposit
guarantee is only as credible as the financial resources that stand
behind it. Financial resources can include national or European resources. Analysts expect that considerable efforts will
be devoted by the Eurogroup as a whole to stop small, insured
depositors from being bailed
in everywhere.
But it should not be
forgotten that deposit
insurance in the EU is a
classic example of the European
Commission mandating without
funding. We know from Iceland’s
experience since 2008, that there are
– or were – national deposit guarantee
schemes in the European Economic
Area that did not have the resources
to make good on even a deposit guarantee up to a €20,000 limit.
Lesson 3: Debt
restructuring
Statements from Eurogroup
finance ministers, heads of state
and heads of government, from
European Commission officials and
from central bankers that there will
be no more PSI for sovereign debt
are no longer considered credible by
analysts around the world.
In the case of Cyprus, City
Research comments, “The risk of
sovereign debt restructuring must
be substantial”. Prior to the crisis,
the EC expected the Cypriot general
government gross debt/GDP ratio
to reach 97% of GDP in 2014
when the fiscal deficit would still
run at 3.8% of GDP. But the Eurogroup’s statement on March 16,
2013 envisaged that under the Cypriot Troika programme, Cypriot
general government debt would be
100% of GDP in 2020. Analysts
now estimate that the very poor
macroeconomic outlook will imply
higher deficits, lower real GDP
growth and lower inflation and thus
a much worse public debt burden
trajectory than forecast.
Even though an upside remains
from the possibility of large increases
in gas production, given the fact
that the actual timing or size of any
eventual government revenues from
the exploitation of the country’s
natural gas resourses is unknown, no
concrete estimates can be made for
the near future.
City Research concludes that
“While the possibility of anticipating future gas revenues is an upside
risk to sovereign solvency, the
downside risks, from much weaker
than officially projected economic
activity to the risk of a potential
‘Cyprexit’, dominate, and a restructuring of Cypriot sovereign debt,
both through PSI and through OSI
(the €2.5bn Russian loan and the
€10bn ESM-IMF loan) during the
next year or two is very likely.”
Euro area countries have already
mandated the inclusion of an aggregated collective action clause (CAC)
in every eurozone sovereign bond
issued after January 1, 2013. Collective action clauses are a supportive
tool to debt restructuring. Euro area
officials have clearly sent the message
to creditors that if there is a future
debt problem in any of the euro
area country they will restructure
its debt.
Banking will have to re-invent itself
By Yiannis Tirkides
T
he resolution of Laiki Bank and the restructuring of Bank of Cyprus will have far-reaching
implications for Cyprus banking. The banking
model of the previous ten years or so has
come to an end; ownership structure has
changed drastically and the imposition of capital controls
is hampering the normal functioning of the banking system
and the economy at large. At the same time, the Eurogroup’s decision to impose losses on insured depositors in
Cyprus also has serious implications for European banking. There are short-term risks but also opportunities in a
Europe-wide context.
Admittedly, the banking model of the previous ten years
or so was unsustainable, not least because of the risk it
entailed for the broader economy. The Cyprus banking
system was too big, undercapitalised, with a thin bondholding buffer, concentrated, and too reliant on non-resident
deposits. Yet supervision was seriously lacking.
Following the recent resolution and restructuring decisions, capital controls have become necessary to prevent
massive outflows from the banking system. The problem
with capital controls, however, is that once imposed, they
tend to stick. And once they stick, they can be particularly
damaging. Turning to the European context, imposing
losses on uninsured depositors in Cyprus is certainly a
precedent and even though it is not anticipated to be used
widely, it carries a number of short-term risks.
Insured depositors will not be affected very much but
uninsured large depositors will become more wary of bank
risk. Thus competition amongst banks for this type of large
deposit will increase – which is not H