Lesson From Cyprus: Cashless Society Equals No More Bank Runs?

Includes: DRR, ERO, EUO, FXE
by: Larry Trefz

Yesterday it appeared that the big one had finally arrived--a real live bank-run, televised to the world from Cyprus.

The drama in Cyprus had been building for days as reporters for every major television network made ready to carry the big story of a country that had endured a nation-wide bank closure for nearly two weeks, resulting from the bail-in program arranged by the EU.

Many financial experts around the world expected riot-like conditions as cash-starved Cypriots would finally have the chance to lay their hands on some cold, hard currency, after waiting for almost two weeks as the bail-in details were hammered out.

The day before the banks opened, world-wide television carried scenes of riot police assembling and shipping containers filled with cash being transported in for the big day.

When the banks did open, there was little sign of trouble or even major discontent. Cypriots formed orderly lines and conducted their banking business showing little more anxiety than people standing in line for an average day's lunch.

The anti-climax of the Cyprus banking closure left many shaking their heads. There is, however, a relatively simple explanation; bank cards, debit cards, credit cards, plastic--call it what you will. Digital currency largely mitigated what in past times would, in all likelihood, have been a tumultuous situation.

File:Bundesarchiv Bild 102-12023, Berlin, Bankenkrach, Andrang bei der Sparkasse.jpg

The relative calm bore little resemblance to past bank-related closures and panics. The reason is not that human nature has changed or that people are less hungry than they were in past generations but clearly that Cypriot citizens were largely able to continue doing business even in the face of their banks being closed for nearly two weeks, with no advance warning.

Many financial professionals have expressed great concern over bank runs and panics spreading from Cyprus to other countries in Europe such as Spain, Greece and Italy.

While anything is possible, a lesson should be learned from the recent situation in Cyprus. As long as credit remains unfrozen and digital money processing mechanisms continue to work, it would appear that physical bank runs, such as those seen in the Great Depression, will be unlikely throughout Europe.

Prior to the Cypriot banks reopening, the EUR/USD fell below 1.2800 on warnings from many financial professionals that the currency would likely fall to 1.2000 or below, fuelled by concerns of bank panics.

It is clear that there are mitigating factors to the general Euro situation that have not been taken fully into consideration by many in the media and finance. Given the facts, I would not look for the Euro currency to decline significantly further in the near term. In fact, there may be a Euro currency rebound as the reality of the situation is seen more clearly.

ETFs that can be used to trade the euro currency include: FXE, ERO, DRR, EUO.

Please note: Leveraged ETFs and ETNs are designed for short-term trading.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.