Like New York’s Knickerbocker Bank in 1907 or Jimmy Stewart’s 1930s bank in It’s a Wonderful Life, the ingredients of a classic run include distraught depositors and rumors of a bank’s imminent demise.
Now we can add a third bank run ingredient: An unexpected depositors’ tax.
Here are some of the facts:
Last June, Cyprus’s banks formally asked for help. Facing huge losses from the Greek debt they owned, they needed a cash infusion. Now, European Central Bank (ECB) authorities said Cyprus would get part of a bailout. But there was a catch. The other part had to come from Cyprus through a 6.75% tax on deposits up to €100,000, and 9.9% tax above that level. Having declared a banking “holiday” through Wednesday and temporarily closed its stock exchange, Cyprus has said it has to decide whether to accept the deal.
Meanwhile Cypriot depositors are lining up at ATMs to withdraw as much as they can before the ATMs run out of cash. Others are trying to wire money out to their accounts in London and elsewhere. As for cash that automatically flows to Cypriot banks, the British have announced a freeze on pension dollars sent to their citizens living in Cyprus.
One more fact that no one seems to be mentioning: Banks that bought Greek debt were able to pay more interest to depositors because the bond yields were higher and riskier. Between January 2008 and now, a $1000 deposit in a troubled Cyprus bank would have paid $242 in interest. By contrast, the same money in a German bank returned $130. And, even with a tax on deposits, Cypriot bank yields would be higher than in the UK.
Where does this leave us? WSJ tells us that, “The IMF [International Monetary Fund] wants a sustainable solution, the Finns an Icelandic solution and the Germans a cheap solution.” In other words, the IMF does not want another Greece where obligations are unrealistic. The Icelandic solution places the burden on depositors. The Germans don’t want to pay for others’ prolificacy.
Add to that Spain and Portugal worrying about their bank deposits as the next tax target. And, we can’t forget the Cypriot politicians who want to get re-elected and the Russians with massive accounts in Cypriot banks.
The one sure thing? Distraught depositors+Distressed banks+Depositors’ tax=A bank run
Sources and Resources: This article from the English version of the Greek newspaper eKathimerini and this one provide a nice counterpoint to other Western media like this WSJ column (gated) and this piece from CNN.