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) -- The Cyprus bank "bail-in" shows why it's better for some European countries to have their own floating currencies.

As many economists have said over the past several years, having a common currency without having common economic policies is a recipe for long-term uncertainty. The saga of Greece's bailout seems never ending, as internal political events periodically threaten previous bailout agreements, which could force Greece to leave the euro.

The events in Cyprus this week show that the northern countries that are part of the common European currency, especially Germany, are not willing to bail out the outsized banking sector of a member country that has touted itself as a tax haven.

Cyprus secured 10 billion euros in bailout assistance for its beleaguered banking sector in a deal that allows Cyprus Popular Bank -- the island nation's second largest bank -- to fail, with its performing assets folded into the Bank of Cyprus. Depositors in both of the nation's largest banks will take losses initially estimated at roughly 30% on balances above 100,000 euro, while smaller deposit accounts will be unaffected.

The good news is that depositors will at least not see their insured deposits subject to a "stability levy," which was part of the original Cypriot bank bailout plan.

The Eurogroup -- made up of the finance ministers of nations that have adopted the euro common currency -- said in a statement that the bailout deal for Cyprus "will be an appropriate downsizing of the financial sector, with the domestic banking sector reaching the EU average by 2018." The Eurogroup also said the 10 billion euro bailout and the decisions taken by the Cypriot government will allow the nation's "debt to remain on a sustainable path."

Cyprus is paying a huge price to stay in the euro. While many of the depositors with uninsured balances taking the huge haircuts live outside the country, there is likely to be a huge negative effect on the island nation's economy, as those foreign depositors will no longer see Cyprus as a safe place to park cash.

In a report discussing the Cyprus situation published early on Thursday, Credit Suisse's European Economics Team said "we expect real GDP to decline by more than 20% in the next couple of years, rendering many assumptions of the bail-out obsolete. Cypriot unemployment is likely to rise above 20%."

If the economy in Cyprus tanks to that extent, the assumptions underlying the recapitalization of its banks will be in doubt. The country's banking sector may need another large cash infusion down the line.

If Cyprus had its own currency, the country at least could take measures similar to some of the ones taken by the

Federal Reserve

in the U.S., on a much smaller scale, to limit economic damage.

After securing the European bailout and the "bail-in" by the large depositors, Cyprus reopened its banks on Thursday, with a limit on withdrawals to 300 euro per day, while allowing people leaving the country only to take up to 3,000 euro in cash, in any currency. The government of Cyprus also announced that "Businesses will be able to carry out transactions up to €5.000 per day, per account and pay staff salaries. Payments and or transfers outside the Republic, via debit and or credit and or prepaid cards are permitted up to €5.000 per month, per person in each credit institution."

Those are very strict capital controls, and will no doubt severely curtail economic activity in Cyprus. Just imagine how difficult it will be for some businesses to operate, when they can only make transactions of up to 5,000 euro per day.

Germans Set Stage for Saying No

European officials are hoping the Cyprus deal will resolve the country's banking crisis, and that the "bail-in" will be a unique event. However, with much larger banking crises in Italy, Spain and Portugal still unresolved, the euro area may be headed for many more complicated bank resolution scenarios.

And political leaders of the European countries with the strongest economies, especially Germany, have to take their own citizens' views into account. There's a limit on how much wealth can be transferred south.

The Deutsche Bundesbank on March 21 published the results of a study on the distribution of wealth in Germany and found at the end of 2010, the average (mean) German household had net household wealth of about 195,200 euro, and that the median German household had net wealth of roughly 51,400 euro.

The Bundesbank also said, according to sources in those countries that used some differing methodology, the median net household wealth was 178,300 euro in Spain and 163,900 euro in Italy.

One reason for the difference, according to the Bundesbank, is that those countries have a higher rate of home ownership than in Germany. "The rate of home ownership in Germany equates to 44.2%," according to the Bundesbank, while "this rate is substantially higher in Spain (83%) and Italy (69%)."

"Unlike all these countries, the German median household is not an owner-occupied property," according to the Bundesbank report.

While everyone knows that games can be played with the reporting and methodology of economic statistics, the Bundesbank report is a political bombshell and the timing of the report's release speaks for itself.

The Credit Suisse team in its report on Thursday said, "the precedent set by the bail-in of a broad range of bank creditors and the suggestion that such a process may be applied to the resolution of other euro area banks and banking systems is likely to have negative effects for the euro area economy as a whole."

While saying forcing creditors rather than governments to bail for bank bailouts "isn't foolish," the Credit Suisse team said "by raising the prospect of a resolution and restructuring process -- with the cost borne by creditors -- and not rapidly implementing it, the euro area economy will start to experience some of the negative effects of such a process without experiencing any of the benefits."

One negative effect is rising funding costs, even in "core countries such as France and the Netherlands," according to Credit Suisse.

Over the past few years, there has been continual see-saw action in financial markets each time a complicated European bank bailout deal is negotiated between a wide array of players, including the Eurogroup of finance ministers, the European Central Bank, the International Monetary Fund, and, of course, euro member countries.

A Purer Bailout Approach

The political unity of the U.S. made it much easier to orchestrate a coordinated bailout of the nation's banking system, for good or ill. At the height of the credit crisis in the U.S., Congress and President George W. Bush enacted the $700 billion Troubled Assets Relief Program, or TARP, in order to take a very aggressive approach in propping up the banking system. TARP begin on Oct. 28, 2008, with the

U.S. Treasury

taking preferred equity stakes in nine of the largest U.S. banks, with some of the banks being forced to take the money.

Another major factor in shoring up large and small U.S. banks was the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program, which removed the limit on deposit insurance for non-interest bearing transaction deposit accounts -- business checking accounts -- until the end of 2012, when all deposit accounts became subject to the regular $250,000 insurance limit. The Temporary Liquidity Guarantee Program also provided government backing for some some unsecured debt, issued by U.S. banks through June 2012.

While there continues to be plenty of outcry in Washington against banks that are "too big to fail," the U.S. government's decision to cover nearly all deposits of the hundreds of failed banks through the credit crisis has helped depositors remain confident.

According to a KBW report published on Sunday, the nation's largest banks had a significantly higher percentage of deposit accounts with total balances exceeding the deposit insurance of $250,000 at the end of 2012, than there were with total balances exceeding the old limit of $100,000 at the end of 2007:

  • According to KBW's data, 64% of deposits at Bank of America (BAC) - Get Free Report were in accounts with total balances exceeding insurance limits at the end of 2012, increasing from 44% at the end of 2012.
  • For JPMorgan Chase (JPM) - Get Free Report, 53% of deposits were in accounts with total balances exceeding insurance limits at the end of 2012, increasing from 51% at the end of 2007.
  • Wells Fargo (WFC) - Get Free Report had 44% deposits in accounts with total balances exceeding insurance limits at the end of 2012, increasing from 41% at the end of 2007.
  • Citigroup had the 31% of total deposits in accounts with total balances exceeding insurance limits at the end of 2012, increasing from 21% at the end of 2007.

Rafferty Capital Markets analyst Richard Bove on Monday said in a report, "in Spain, the government has apparently made the decision to recapitalize the nationally owned banks. The shareholders in any partially publically traded institutions will be wiped out and it is estimated that bondholders in these companies will lose 30% of their investments."

The resolution of Spain's banking crisis and the resolution in Cyprus "will be truly terrible," Bove wrote, adding that "depressions will ensue for many years causing incredible misery.

"Observers will learn why it is bad policy not to bail out banks; why main street wins when banks are bailed out," he wrote.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.