by Jonathan Weil
March 28, 2013
from Bloomberg Website


Whatís a Slovenian with several hundred thousand euros in the bank supposed to do? Spread it out among at least a few different banks, thatís what. Or move the money out of the country, while itís still possible.


Imagine what must be on the minds of any savvy depositors still left at Nova Kreditna Banka Maribor d.d., now 79 percent- owned by Sloveniaís government. It was one of only four lenders in October that failed the European Banking Authorityís latest capital-adequacy test, a ritual best known for how lax its standards are.


One that flunked was Bank of Cyprus Pcl, where uninsured depositors face 40 percent losses as part of the countryís bailout terms. Another was Cyprus Popular Bank Pcl, also known as Laiki Bank, where uninsured deposits will fare far worse and the bank is being shut.


Cypriot banksí customers were complacent after uninsured deposits went unscathed in,

  • Ireland

  • Greece

  • Spain

  • Portugal,

...the first Euro-Area countries to seek international rescues. Slovenians wonít have that excuse should their country be next.


The former Yugoslav republic needs about 3 billion euros ($3.8 billion) of funding this year, while its struggling banks need 1 billion euros of fresh capital, the International Monetary Fund said last week.


Sloveniaís central bank this week urged the countryís new government to quickly carry out a plan to recapitalize ailing lenders. Itís a familiar pattern.  





Oblivious Customers


The Central Bank of Cyprus warned months ago that the countryís banks needed an infusion of 10 billion euros - which is more than half the size of the nationís economy - largely because of heavy losses on Greek sovereign debt held by Laiki and Bank of Cyprus.


It seems a lot of customers were oblivious to the banksí deteriorating health, or were confident they would be cared for by somebody else. The country is getting a 10 billion-Euro bailout, nine months after it first asked for aid, except none of the money will go to the banks.


Suddenly it should be dawning on a lot of Europeans that deposit-guarantee limits matter.


In Slovenia, the maximum is 100,000 euros per depositor, the same as in Cyprus. (Deposit-insurance programs vary among the 17 countries that use the Euro.) For a few days last week, it looked as if customers at Laiki and Bank of Cyprus would lose even some of their insured deposits, which would have been a sacrilege.


That plan was scrapped, but could resurface elsewhere for all we know should some genius at the German Finance Ministry insist upon it. The one constant among bailouts of euro-area countries is that there is no rhyme or reason, much less fairness, in the way many details get worked out.


Cypriots may bemoan the inequities of their rough treatment, as might a bunch of wealthy Russians who mistook the island for a reliable financial center and failed to yank their money when they could. For the rest of Europe, the implications should be obvious.


Anyone who leaves uninsured deposits in a Euro-Area bank is on notice that their money can and will be taken from them, if that is whatís demanded by the troika of the IMF, the European Commission and the European Central Bank.


Uninsured deposits arenít riskless. Nor should they be. Still, itís unclear why the Euro-Areaís central planners sought to create a precedent that encourages capital flight from weak countries. This could lead to more instability, not less.


So far, there have been no signs of a mass exodus in countries such as Italy or Spain. But deposit migrations can happen slowly, with lots of time passing before they appear in official statistics.


Or maybe little will change and most bank customers will go on believing ďit canít happen here,Ē until one day it does.





Restoring Normalcy


Much good might come from restoring some semblance of normalcy to the hierarchy of creditors in banking. Even better would be to see Germany try it for a change with its own zombie lenders, such as Commerzbank AG (CBK), which is still partly government-owned after its bailout in 2009.


The way itís supposed to work at failing banks is that shareholders get wiped out first.


Next the losses go up the ladder from junior debt holders to senior bondholders, and then all the way to uninsured depositors, if need be. Taxpayers and insured depositors shouldnít have to absorb othersí losses or put money at risk to spare them. Troubled banks should have to fend for themselves.


This was the approach imposed on Cyprus. In ordinary circumstances, it would be considered fair. The best argument for why it wasnít is that Cyprus had been lulled into believing it would be treated just as well as Europeís other bailout recipients. The entire country got hooked on moral hazard.


Now Cyprus may be the template for the future, regardless of European governmentsí recent statements to the contrary.


If a bankrupt Euro-Area country canít afford to recapitalize its own insolvent banks, it will have to ďbail inĒ their owners and creditors first as a condition of receiving outside aid. Or at least thatís what Dutch Finance Minister Jeroen Dijsselbloem said this week in an outburst of candor, before later retracting the statement after it triggered declines in European markets.


Wealthy depositors in Spain, Italy, Greece and elsewhere should assume he was speaking the truth the first time and take measures to protect their money, rather than trusting governments to do it for them.