What Happened to Cyprus's Deposit Insurance Scheme?

So much for all quiet on the Eurozone front, a quiet which barring election rumblings from Italy has largely been enjoyed since Drahgi's LTRO blitz.

While it's unclear whether this weekend's 'bailing in' of Cyrpiot depositors will prove the trigger point for the final Eurozone reckoning, what is clear is that all the 'crazies' who have been stashing their money under their mattresses perhaps weren't so crazy after all.

One thing I'm curious about, which I haven't seen discussed in any detail anywhere else, are the mechanics behind what happened to Cyprus's deposit insurance scheme.

For example, is the insurance scheme, like the entire Cypriot banking system, insolvent? If yes, by how much? Could it be recapitalized through a tax? Etc.

The high level details of Cyprus's deposit insurance program, which goes by the name Deposit Protection Scheme (DPS), are discussed on the Central Bank of Cyprus's webpage here. As has been widely reported, depositors in Cypriot banks are supposed to be fully insured for €100.000 "per depositor, per bank".

Some reports state that if Cyprus's banks were allowed to fail then the small, fully insured depositors would be made whole. So do depositors who have €100.000 or less of insurable deposits have recourse for legal action in Cyprus?

One thing is clear: if I were a Cypriot depositor I would much rather have cash right now than shares in an insolvent bank.

Greek ATM Withdrawal Limits Under Discussion

More here.

Happy Free Positive PR for UK Banks Day!

One somewhat peculiar difference between the U.S. and UK is how in the UK (and Ireland) official public holidays are referred to as 'bank holidays'. From Wikipedia:

A bank holiday is a public holiday in the United Kingdom or a colloquialism for public holiday in Ireland. The first official bank holidays were the four days named in the Bank Holidays Act 1871, but today the term is colloquially...used for public holidays which are not officially bank holidays, for example Good Friday and Christmas Day.

I have no idea whether Brits on whole form any positive associations towards banks because of this, but if nothing else it strikes me as some nice free, positive advertising for our friendly, neighborhood Too Big to Fail banks.

Here's an idea: perhaps renaming 'bank holiday' to 'public holiday', or something similar, would allow a pol to campaign on a symbolic, anti-banker message that also poses low-to-no risk to the establishment.

Irish Banks Have Lost 40% Of Deposits, Why Have Greek Banks Only Lost 19%?

Irish banks have lost 40% of their deposits over the past 18 months, whereas Greek banks have lost 19%. (Without thinking I almost inserted a 'just' in front of the Greek figure, but 19% is still a significant number!)

Right now the risk is much greater for Greece than Ireland of either leaving or getting kicked out of the euro, followed by:

1. Declaring a bank holiday
2. Enacting capital controls
3. Restricting Shengen and imposing limitations on travel, reducing the amount of money which can be taken out of the country per visit, or both
4. And then devaluing the new currency by approximately 50%

Naturally, one would expect deposit withdrawals to be much higher in Greece than Ireland, but according to official statistics the opposite is the case.

From Bloomberg:

Deposits by financial institutions in Greek banks, which make up 21 percent of the total, have fallen by one-third since the beginning of 2010, while those by non-financial firms and residents dropped 9 percent, according to Bank of Greece data. 

People “are now afraid of the possibility of returning to the drachma,” said Giannoulis, referring to the Greek currency in circulation before the country adopted the euro in 2001. “Just a headline is enough to spook depositors.” 

Something doesn't smell right here. If Greek depositors were really afraid of returning to the drachma then they'd be pulling euros out en masse and stashing them under the mattress or opening bank accounts in other countries.

Greece has reported wildly inaccurate economic figures since the crisis began so one possibility here is that the 19% in withdrawals is another fraudulent Greek figure and massively understated. Recently Greece quietly activated the Emergency Liquidity Assistance (ELA) program in what was described as 'last stand' for Greek banks:

The ELA was designed under European rules to allow national central banks to provide liquidity for their own lenders when they run out of collateral of a quality that can be used to trade with the ECB. It is an obscure tool that is supposed to be temporary and one of the last resorts for indebted banks. So far it has only be used in Ireland. 

By accepting a lower level of collateral the debt in the ELA is, in theory, supposed to be the responsibility of Greece. However, since the Greek state is surviving on eurozone bailouts and Greek banks are reliant on ECB funding, in practice the loans are backed by the eurozone. The terms of lending and other details are not disclosed publicly. 

Mr Ruparel said: "Though the ELA is meant to be a temporary emergency solution, we know from Ireland, where the programme has been running for almost a year, that once banks get hooked on ELA they rarely get off it."

More about the slow motion European bank run here.

End Game: Greece to Default This Weekend?

While the Greek government is publicly denying it (I suppose they have to until the banks close) the game appears to be up (further confirmation from Spiegel here).

The timing of the default would come roughly in line with my prediction. We're also seeing a softening in the euro, now down to $1.36, also as predicted.

In terms of what happens next, the first step following default would likely be a bank holiday in Greece. This would then be followed by some type of devaluation (rumoured to be around 50%) of the reintroduced drachma.

As I posted yesterday, anyone in Greece who still has their euros in a Greek bank may want to move swiftly.

Here is Professor Eichengreen with some deeper perspective and why its likely the ECB is going to be doing a lot of Ctrl+P.