While a painful deal was struck to salvage the future of Cyprus in the Eurozone, the shockwaves will be felt for a much longer time. Many are of the opinion that the way political leaders debated a rescue for the Cyproit banks has fanned public’s mistrust in banks. Political leaders of Eurozone essentially transferred the risk from the government to the private sector in the infamous bailout deal. The raid on the money of wealthy depositors has broken the trust in money. A research report compiled by Hans Mikkelsen and Richard Thomas from Bank of America Merrill Lynch pens the same views opining that, “that banks will never look the same post-Cyprus.” Steve Forbes, chairman of Forbes, said the same, stressing that the event has increased political mistrust among the people of struggling economies in the Eurozone, he said,
“The idea’s out there that now in a crisis politicians won’t hesitate to seize any asset they can lay their hands on. So it just guarantees more fear in the future when a crisis comes, which it will come.”
The analysts at BofA believe that the US is positioned more safely in its credit spreads but the contagious effects of Cyprus bailout cannot be denied, as the 10 yr spreads have widened 10 bps since 15 March in sympathy with the European spreads which widened by more than 6 bps to 15.5 bps in the same period.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
Fears that the bail-in from bondholders and shareholders that has been designed for Cyprus will be used as a model to rescue other indebted economies in Europe spread anxiety across the private sector. Comments from Jeroen Dijsselbloem, President of the Eurogroup of euro zone finance ministers, intensified the speculation that other countries will face the same fate as chosen for Cyprus. His remarks in an interview given to Reuters and FT spooked the markets and investors, in his words,
“If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders.”
Dijsselbloem later retracted his statement and Eurogroup issued a rare clarification but the damage was done, as pointed out in BofA’s analysis. Ordinary depositors cannot be expected to differentiate between banks with strong and weak capital ratios or to understand which countries are worthy of such a drastic rescue plan, therefore extrapolating Dijsselbloem’s statement to draw terrible conclusions would be straight forward for the public.
Based on the changed economic situation BofA has wrapped up its trades in the European 10 year swap trades, instead of taking a short position on the 10 year swaps the bank has taken a long risk position in in US bank/broker CDS. The analysts also believe that Greece, Portugal, Ireland and Spain have structured bailout programs in place which are unlikely to hit a snag. As for Italy, the economy remains more at risk than others but the risks of a default are bleak due to the wealth base of the country. Moreover the recapitalization of Italian banks puts little pressure on the GDP even with the worst case estimates. BofA expects managed funds and fixed income deposits to recruit more inflows based on the Cyprus development, as large depositors get more cautious.
Meanwhile the spreading fear of getting the same pill as Cyprus did is exemplified by what Prime Minister of Luxembourg said today. In his statement he quashed opinions that were drawing comparisons between Luxembourg and Cyprus, saying that its financial sector has a high solvency ratio as compared to Cyrpus. Assets of Luxembourg’s banking sector are 22 times of its GDP.