When Will Deposit Haircuts Take Place In Other European Countries?

Tyler Durden's picture

When all is said and done, what happened in Cyprus over the past two weeks, is nothing but the culmination of re-marking the "assets" in the country's financial system (which as noted previously, were a preponderance of worthless Greek bonds and countless other non-performing loans), long priced at assorted "myth" levels, to a long overdue reality.

As a result of delaying resolving the mismatch between non-performing assets and liabilities for years, the resolution was one which saw some €16 billion of the total asset base impaired, which in turn necessitated the impairment of billions of deposits: the primary liability funding the Cypriot financial system.

Furthermore, as a result of the "Freudian Slip" by the Eurogroup's new head earlier this week, we know that Cyprus will be the template for all future bank resolutions, which seek to avoid a democratic popular vote of depositor self-impairment (a vote which is now known will never actually pass) and proceed to restructuring the banking sector a la carte, by liquidating bad banks and impairing liabilities to the point where the balance sheet is once again viable (however briefly).

The bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. Which means that the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? Thanks to Credit Suisse we now know the answer.

The chart below shows the liability breakdown for various Eurozone nations, of which the key line item is the Total Deposits, and which in Europe comprises the bulk of bank funding. It becomes obvious why Cyprus had no choice but to crush depositors: they make up a whopping 84% of all liabilities (the highest in Europe and matched only by Greece), so assuming all other liabilities are liquidated, there still would be impairments if the total bad assets (assuming all bank assets are loans which in Europe, unlike the US, is more or less the case) pushed above 16% which in Cyprus they did.

So applying some simple balance sheet equality math, one can quickly calculate how much of a "Bad-Debt Impairment" assorted European financial systems can withstand before they too have no choice but to follow in Cyprus' footsteps and begin crushing depositors, who in bankruptcy court are known by a different, less friendly term: General Unsecured Claims.

The resulting chart is below:

Not surprisingly, in first place is Cyprus which underwent precisely the deposit haircut exercise that would have befallen Greece as well (at the same bad debt capacity), if only Greece had an easily expendable, for political reasons, deposit class - Russian Oligarchs. However, as more and more bad-debt accumulates within the system, the ability to provide a liquidity buffer, instead of resolving what is fundamentally a solvency issue, evaporates, and soon Greece, then Belgium, the Slovenia, then Spain, then Portugal, and so on, will have to address which, as Cyprus clearly demonstrated, is a solvency problem, not liquidity!

When will such days of reckoning happen? Ask the Cypriots: they had no idea they would wake up one day with virtually all of their deposits over €100,000 wiped out. Point being - nobody knows, or more specifically, fundamentally this is a political decision, usually one which is taken ahead of elections (i.e., those in Germany this September), and which has nothing to do with actual finances.

The reality however is that all of Europe's banks have a soaring bad-asset overhang, and sooner or later it will have to be resolved.

It is now common knowledge that such resolution will not take place via additional liquidity injections, but through impairment of the various liability classes as per the reverse waterfall of seniority: first equity, then capital and reserves then junior debt, and finally, senior debt and deposits (with secured senior debt last).

The lesson here is: do your homework, and know your bank. If one's deposits are in a bank that has, or is rumored to have, many bad loans, then pull your money and either put it in a safe bank, put it offshore, or just keep it under the mattress.

Because what happened in Cyprus is now, despite all promises to the contrary, the template for what will happen to all the countries to the right of Cyprus on the chart above.

It's only a matter of "when."

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ziggy59's picture

CYA... Cover Your ASSets!

Abraxas's picture

"Furthermore, as a result of the "Freudian Slip" by the Eurogroup's new head ..."

Freudian slips made by Jungean Shadows.

Passage's picture

ECB won every battle (in Ireland, Greece, Spain, Cyprus... ...), 
BUT they are losing the war.

redpill's picture

The real question is, is anyone who has more than 100k Euro in the bank going to stick around to find out?  I'd think not.

MillionDollarBonus_'s picture

What kind of economy is this? How are we supposed to tackle problems in a globalized world with non-uniform, disorganised policies enacted by a labyrinth of local governing institutions? The idea that we can tackle today's global problems with local government is a myth that is rapidly losing favor with global leaders. The time for a new world order is here. It's now just a question of how we will structure our global governing institutions.

francis_sawyer's picture

I suppose you are in favor of an unelected 'Supercommittee' consisting of Ivy League educated scholars [with you playing the part of their sychophant pool boy & the rest of us playing the part of their ornamental lawn niggers wearing jockey silks...

Mountainview's picture

More pragmatic: What should I put in my mattress?

Manthong's picture

I am so through all this negativity.

I am buying all fiat stuff until I bust.

gold-is-not-dead's picture

MillionDollarBonus_ for a world president and a mandotory first wedding night wife deflorator!

ZerOhead's picture

American (FDIC), Russian, Canadian (CDIC) and Phillipine account insurance claim payout protocols in brief.

http://www.fdic.gov/bank/analytical/quarterly/2010_vol4_2/claims.html

They try to do it in months but they can if they wish or need (especially under exceptional circumstances hint hint...) take years to pay you back. However I am sure there will be no chance of inflation in the interim.

And they merge all individual account balances that you own.

Just so you know...

Now if you'll kindly excuse me I have got to place an order for some fish and chips for the fishbank to deliver to me in a couple of days...

american eyedol's picture

there was no panic no banklines etc,,,,,i don't care anymore move on, obama needs to do what he needs to do devalue etc and move on,,,,,,,,,if our middle class turns out to be like every other county then that great and for the better,,,,people were aholes in the mid 2000's anyway

DaveyJones's picture

Is "haircut" the new PC term for scalping?

Diogenes's picture

Shearing the sheep. Not scalping. Remember, you can shear a sheep every year but you can only skin him once.

macholatte's picture

 

The lesson here is: do your homework, and know your bank. If one's deposits are in a bank that has, or is rumored to have, many bad loans, then pull your money and either put it in a safe bank, put it offshore, or just keep it under the mattress.

 

Yes. Good advice, but how do you know? The "truth" is buried deeply in the lies & propaganda as has been demonstrated repeatedly. I submit that no amount of research could have provided the correct result. Insider information is the only real way to navigate the fog.

Joe Davola's picture

But, but, but - the stress tests, they always pass!

DaveyJones's picture

it's a lot like.... food

when you can't trust your money or your food things are....pretty fucked up

Totentänzerlied's picture

When in doubt, and when there's money at stake, stereotype: They're all bad.

Dumpster Fire's picture

Searching for that missing right bracket is driving me nuts

eclectic syncretist's picture

"how we will structure our global governing institutions"

A couple of suggestions come to mind like;

1) Without central banks

2) Without fractional reserve banking

There, problems solved!

MillionDollarBonus_'s picture

National central banks will become less significant. Each will have to work in conjunction with a single world central bank. Monetary policy needs to be centralized in the global economy. This bank will be responsible for managing the supply and exchange rates of the new global currency. Interest rates will be set by a committee with a representative from each country, in conjunction with daily exchange rate fixings.

BigJim's picture

Stop, before Paul Krugman's erection gets bigger than he is!

ghandi's picture

An error does not become truth by reason of multiplied propagation, nor does truth become error because nobody sees it.

Tombstone's picture

We already have a new world order.  Capitalism, responsibility and free markets have been replaced by welfare/statism and Kommies drunk on spending. 

bagehot99's picture

MDB - are you just a provocateur or are you really that dumb? The supranational institutions such as the EU have caused this mess, precisely because economies are very much local (albeit with global components), and ONE SIZE DOES NOT FIT ALL. It never has and never will.

The answer to this isn't process or governance driven. It's behavioral - running up massive debt using artificially created wealth to justify cheap money, and then wondering why asset bubbles keep inflating and bursting.

If there is a company paying you a million dollar bonus they must be run by fucking simpletons.

BTFDemocracy's picture

MDB - He's quite smart to come up with those perfect lines.

theprofromdover's picture

MDB -you aren't reading enough. What do you think the Eurozone is if not a single central bank for almost an entire continent? A perfect microcosm to try out your experiment.

Maybe you might bless us with your analysis of how it turned out.

Here are a few clues how to run an economy-

You can play with inflation

You can play with employment

You can play with taxes and government spending

You can print money

You can tamper with interest rates

You can try to devalue your currency and mess around with import/export trade imbalances

You can work harder.

You can invade your neighbours.

But if you have given control of your finances to someone in another land who doesn't share your local concerns, you are at their mercy.

 

Go study France- since 2001, they have been trying to support a massive welfare state, and accomodate powerful unions and a bloated agricultural sector, without their own currency.

Hollande has found out they are stoney broke, and tried to do his own form of theft by punitive taxes (on the wealthy this time however). He is praying Germany leaves the Euro before the Frogs are found out to be destitute cousins.

francis_sawyer's picture

Haircuts?... Well ~ the Marc Faber baldheaded ponytail is, after all, a 'fashion statement'...

Diogenes's picture

The statement is "I want to look like a horse's ass"

Larry Dallas's picture

Being cynical at best, paranoid at worst, did anyone bother to think that this could be a globally coordinated scheme to force repatriated dollars back into the US? For whatever the reason (inflate USD, Treasuries, Commercial/High end Resi real estate)?

Stackers's picture

must keep gold under $1600

must keep gold under $1600

must keep gold under $1600

must keep gold under $1600

must keep gold under $1600

must keep gold under $1600

Kaiser Sousa's picture

THE SAME PATTERN DAY AFTER FUCKING DAY...

slam at or just after the open in London followed by attemtps to regain that are beat back...

slow continuous decline that accelerates at or around the open in Fraud City (NY)

attempts to regain are twarted and sideways trading up until the end of trading in London where a gradual decline occurs around the last hour until the close...

Sideways trading for the rest of the day in Fraud City until around the close where further selling takes place......

IF SOMEONE CAN PULL THE CHARTS FOR ALL OF THIS YEAR TO DATE YOU WILL C THIS SHIT IS NOT FUCKING COINCIDENCE AND IS COMPLETE FRAUD AND M A N I P U L A T I O N!!!!!!!!!!

Zwelgje's picture

Let these fools play their game. You get more gold and they have to spend energy and resources doing this. There must be some arbritage going on that costs them.

DaveyJones's picture

good point...if they weren't screwing all our children

yrbmegr's picture

Interesting.  In the U.S., I think that would be a Fifth Amendment "taking", requiring compensation to the depositors.

TruthInSunshine's picture

It's not deemed legally "ripe" as a constitutional controversy that has standing to be heard by the courts until the FDIC is declared insolvent and/or otherwises announces its inability to compensate FDIC account holders at a rate exceeding 1/5th of one cent on their "insured" Federal Reserve Debt Notes.

SafelyGraze's picture

for those with non-pdf mobile devices, here is the relevant passage

Establishing a Risk Management Framework for Domestic SystemicallyImportant Banks

Economic Action Plan 2013 will implement a comprehensive risk management framework for Canada’s systemically important banks.

Canada’s large banks are a source of strength for the Canadian economy. Our large banks have become increasingly successful in international markets, creating jobs at home.

The Government also recognizes the need to manage the risks associated with systemically important banks—those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy. This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.

The Government intends to implement a comprehensive risk management framework for Canada’s systemically important banks. This framework will be consistent with reforms in other countries and key international standards, such as the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions, and will work alongside the existing Canadian regulatory capital regime. The risk management framework will include the following elements:

- Systemically important banks will face a higher capital requirement, as determined by the Superintendent of Financial Institutions.

- The Government proposes to implement a "bail-in" regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.

- Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.

This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are "too big to fail."

 

notes:

"large banks are a source of strength" .. which is why this section is about how to deal with their spectacular weakness

"reduce risk to taxpayers" is a phrase that allows both depositors and taxpayers to be be "assessed" .. otherwise the language would be more like "the government will not disburse tax revenues to any failed bank"

"the mistaken belief .. that these institutions are too big to fail" means "the accurate belief", since the whole point of this section is to describe how to keep the large banks from ever "failing" .. a belief supported not only the "bail in" but also the term "systemically" in this section

 

 

Kaiser Sousa's picture

but dont worry...

this is for one of those "unique" situation thing of ma' jiggies....

angel_of_joy's picture

You're getting boring, mate.

If you are dumb enough to keep more than 100k in ANY Canadian bank (or whatever they decide the insurance limit is), then you deserve it good and hard !

5th grade knowledge, really...

ZerOhead's picture

That would be me...

And fifth grade was tougher than you think...

Diogenes's picture

The 100K insured limit does not apply to a bail in. It only applies to a default. The bail in makes a default impossible by converting a liability (depositors' money) to an asset (banks' money).

Therefore, there is no insurance and no limit on what size account they can tap.

SafelyGraze's picture

et pour les zero-hedgeurs francophones:

http://www.budget.gc.ca/2013/doc/plan/budget2013-fra.pdf

pages 159 160

"Le gouvernement propose d’établir un régime de recapitalisation interne pour les banques d’importance systémique. "

recapitalisation interne

that's right

internal recap

like a script for a canadian porn flick
or a script from the island of jersey

Creepy Lurker's picture

Just more proof that the crap they pull in Europe comes across the pond. It's just a matter of time, folks.

If its not in your hand, you don't own it. Them's the new rules.

The Navigator's picture

Them's the old rules..... that almost everyone has forgotten. 

YBNguy's picture

"Haircut" - Don't you mean decapitation, or Sweeny Todd-esque straight razor to the neck?