Pawel Morski has summed up the short term risks:
There are three key risks attached to the plan right now: 1) immediate bank-run contagion; 2) the Cypriots vote “no” to the deal and end up leaving the Euro. 3) the deal passes, but depositors judge that 10% is just the appetiser and scarper. This leaves an imploding banking sector gasping for fresh capital.
All fair. A bank run spreading to Spain looks a non-starter in the short term, while the other two risks are dependent on a host of variables — not least of which, Europe’s reaction to a “no vote” in the Cypriot parliament that we haven’t even had yet. So as we wait to see what actually pops out of Anastasiades’s scramble for votes — as it stands a rejection of the deposit tax looks likely — we may as well look at a longer term risk which has been a little ignored.
Citi’s Tina Fordham et al make the point (with the full note in the usual place) that even if the deposit levy, for insured deposits in paricular, is discarded now, there is a very decent chance that a proportion of the Europe-wide electorate will be disconcerted over the long-term by the implied threat to the deposit guarantee, and this sentiment will be promoted by anti-Europe politicians.
Unlike other crisis-struck eurozone countries, the major political groups in Cyprus were almost entirely pro-bailout, at least up until the announcement of the bailout package. Fifty (50) of 56 (89%) seats in the Cypriot parliament were occupied by ostensibly pro-bailout parties. The recent presidential election, held only last month, was largely a debate over austerity, not Cyprus’s relationship with Europe or membership in the single currency. Think Sarkozy vs. Hollande, not Bersani vs. Grillo. (It’s worth noting that Cyprus has a Golden Dawn-style far-right party called ELAM, which has so far failed to win seats in parliament with its 1% of the vote in the 2011 election.)
As we’ve suggested, the political ramifications of the Cyprus deal go beyond what is ultimately enacted into law. Along with last month’s Italian election, the depositor “buy-in” marks a new turn in the eurozone crisis. We have long warned of two macro trends: the rise of anti-establishment sentiment and the increased skepticism towards European obligations in the midst of a slow-growth or no-growth economic situation. In our view, it’s difficult to see how the Cyprus deal as it stands today would ameliorate these two risks.
You can row back as hard as you like and try to spead the blame about but it’s a big stick to have handed out so casually or confusedly or unthinkingly or to keep Russia/ Russian business happy or to appease the German electorate… depending on how you want to judge it.
The Eurogroup’s ambiguous statement put out last night appears, in the words of JP Morgan, designed to limit the backsliding within a region that could become very divided over this issue. Regional policymakers understandably want to disassociate themselves from the ‘Granny tax’, as comments overnight from the French Finance Minister and the Portuguese President imply.
The Eurogroup statement… enables the doves to claim that they support small depositors, without having to do anything that would upset the hawks (since nothing has really changed). The last similarly abstruse statement – which needed to be read two ways by the two camps – came on legacy bank assets last June, when the Irish and Spanish were encouraged to believe something different from the Germans, Dutch and Finns. Division on this issue lies just beneath the surface, in our view, and we expect it to become increasingly obvious.
The statement also includes an attempt to reinforce collective responsibility, by reiterating that Finance Ministers and the Cypriots all signed off on the agreement last week. This is revealing in itself; an implicit acknowledgement of the fact that – despite the claims of Schauble and Asmussen to the contrary – Euro area finance ministers were at least partly involved in agreeing the terms of the haircut last week, approving the specific hit to small depositors. Fairly or not, it could lend credence to the Cypriot claim that they were pushed into the modalities of the tax by the rest of the region. The Euro area statement may act to limit the blame game, but it could also inadvertently exacerbate it.
So while the risk of any wider bank run looks pretty small so far, with market reaction relatively benign, the chance of more aggressive political blowback shouldn’t be overlooked.