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Further EU bank runs inevitable after the failure of Cyprus Popular Bank

Posted on 25 March 2013 with 3 comments from readers

After all-night talks EU foreign ministers have agreed a new bailout package for Cyprus but one that imposes much tougher penalties on large depositors than the first deal. Depositors with more than 100,000 euros at the Cyprus Popular Bank will be wiped out while those holding more than that sum at the Bank of Cyprus will lose 40 per cent.

The draconian move on larger depositors will inevitably provoke a run on the banks in other heavily indebted EU nations with fragile banking sectors, namely Spain, Portugal, Greece and Ireland. At the very least depositors will want to split larger amounts to hold no more than 100,000 euros in any single bank.

New deal

The latest 11th-hour Cyprus agreement calls for Cyprus Popular Bank closed and split. Bank of Cyprus will take over the viable assets of the failed bank along with nine billion euros in central bank-provided emergency liquidity aid, reported Bloomberg this morning citing EU officials.

Deposits of less than the EU deposit-guarantee ceiling of 100,000 euros will be protected, but the uninsured depositors at Cyprus Popular are to be ‘largely be wiped out.’

Having safeguarded the majority of smaller depositors the way should now be open for the Cyprus parliament to approve the deal and avoid a financial collapse. The cost, however, is very high and not only for the non-insured depositors. The island’s lucrative offshore banking sector is in tatters and its reputation irreparably ruined.

Will EU finance ministers live to regret their action? It works at the democratic level but is something of a disaster for the EU banking system which will now have to suffer another round of damaging bank runs by larger depositors scared about losing their money in a future banking collapse.

Fear is contagious

Ironically it is that very fear that now might cause another banking failure elsewhere. Banking is a matter of trust and confidence. The fall-out from the Cypriot banking affair is not going to be nearly as easily contained as signing off a rescue might appear to make it.

Can EU banks now be trusted as custodians of larger sums of money? Well yes, evidently some can and some cannot. The marketplace will now decide which banks close next.

The winners are going to be the banks of Germany and Austria, and outside the EU money will seek new financial centres like Istanbul and Dubai, though probably not Beirut or Bahrain given current security issues. The UAE gave an unlimited, three-year guarantee to all its bank depositors in the global financial crisis.

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Posted on 25 March 2013 Categories: Banking & Finance, Bond Markets, Global Economics, Islamic Finance

3 Comments posted by readers:

Comment by Ronaldo - 25 March 2013

“Deposits of less than the EU deposit-guarantee ceiling of 100,000 euros will be protected”

Is very relative.
Rememeber the first proposition was to cut them off also with some amount of money. So basically the guarantee is working until the government decides not to.

Comment by Bernard M.A.Doff - 25 March 2013

“The UAE gave an unlimited, three-year guarantee to all its bank depositors in the global financial crisis”

Not to mention the free “haircut” given to the international lenders and construction industry contractors. Very generous indeed.

Comment by Joe - 28 March 2013

Why not US banks, Canadian banks or others?

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