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Monday, March 25, 2013

Is Dijsselbloem Trying to Start Bank Runs Across Europe?

Eurogroup chair Jeroen Dijsselbloem, who led the negotiations that produced the initial Cyprus bailout program of haircutting all depositors via a "tax" on deposited amounts, demonstrated this afternoon a gift for consistency, when he told reporters that the revised program, which wipes out more than half the uninsured deposits at the two largest banks, on a combined basis, would serve as a template for further bank restructurings across the Eurozone.  The clarity of which undoubtedly inspired CFOs throughout the Eurozone to begin moving their deposits from Eurozone-regulated banks to those from other jurisdictions.  Because any business of any size is going to have over 100,000 euros on deposit in some bank.

Imagine you're a Mercedes dealer.  100,000 euros is what, two new car sales?  You may do that in a day.  You undoubtedly do more in a week.  Or you sell jet fuel to airlines that land at your local airport and they pay you monthly.  Your account might hold millions on a given day.  Well, Dijsselbloem has most helpfully informed you that you will be bearing the risk of its bank's balance sheet, in addition to your own of course.

I am just stunned at the failure of the people in charge of continental Europe to grasp basic facts about this very large sector of their economy. They moralize at the drop of a hat about derivatives and speculators and get all high & mighty about salary caps on bankers and asset managers, but they don't even understand the most basic facts about banking:  you can't have a banking system without a stable deposit base and none of the businesses in their multi-trillion euro economy can function if they don't have 100% confidence that their cash balances are safe overnight, so they really don't have a modern developed world economy without stable deposits.  There is no real-world scenario in which they have one without the other, whatever fantasies might occasionally bubble up in ideological self-indulgence about free market superiority, or populist rage about "banksters"  This incompetent appears to be putting not just the common currency at risk, about which there are differing views, but their whole economy at risk.  Whoever put him in place needs to find a replacement fast.

Tyler Cowen makes many good points about the situation.