By Carlos Guillen
Just as it occurred last week, this week is also beginning with all eyes on the euro zone and the actions on Cyprus. After some back and forth, a new deal has been reached between the Troika (European Commission, the European Central Bank, and the International Monetary Fund) and the Nation of Cyprus, a deal which has set a new precedent in how risk will be distributed within the euro zone. At the moment investors appear to not have been very enthused with the new directions the euro zone has taken, but at the same time investors' negative sentiment toward this new direction is not that bad, as reflected by the Dow Jones Industrial Average losing close to seventy points or about half a percent.
Well, despite all the controversy and criticism of the new direction that has been taken in the euro zone in handling risk, the nations of Cyprus can take a sigh of relief in the fact that it has not only prevented failure of its banking system but also avoided expulsion from the euro zone by bowing to demands from creditors to shrink its banking system in exchange for 10 billion Euros ($13 billion) of aid. This time however, risk has been spread to include depositors as well. As it stands, the new agreement has deposits below 100,000 Euros spared (which are insured), with no penalties. However, the deal will impose losses that will not be more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (NYSE:CPB), the second biggest. Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus. This plan will contribute roughly 4.2 billion Euros to the 10 billion Euro bailout package.
Where this new approach to bailing out banks will take us is anybody's guess, but one thing is for sure, Italy and Spain depositors will certainly be thinking hard about what to do with their cash. In fact, banks in Italy were halted at one point in today's trading.
This week here at home we will be taking a look at more news on consumer attitudes and the factory sector, which ends with the U.S. financial markets closing for observance of Good Friday. Of main importance will be The Conference Board's consumer confidence index which will be reported Tuesday, and the University of Michigan final March index of consumer sentiment which will be out on Friday. Quite interestingly, both of these indexes are expected to move in slightly different directions, so this can shake markets in either direction.
Spiderman Can't Save this Bank Run
And so Eurogroup finance head Dijsselbloem has brought the hammer down on European banks today (and the stock markets at large) with his new "bail in" model for recapitalizing banks. Rather than having the Cyprus government vote on a taxpayer bailout of the nation's major banks (which would require a vote), they will instead go ahead and leave it to the shareholders, bondholders and depositors to support those institutions.
But the key is that he's also vocally established this as a template for any future actions within the Eurozone and that means if you're a shareholder, bondholder or customer of any shaky European banks you're starting to get frightened. The likes of Italian banks Intesa and Unicredit (at one point they were halted on the exchange), and Spanish bank BBVA are down more than 5%. If one has their deposits in one of these banks, especially if they have more than €100,000, their money may be on the line if it starts to go under so they would only be smart to reconsider keeping their money there.
These banks may consider taking a page out of Spanish bank Bankia's book, which last year (I kid you not) resorted to offering free Spiderman towels to investors for keeping their deposits there as it was bailed out by the government in the biggest bank rescue in the history of the country. Something tells me all the Spiderman towels in the world aren't going to fix this one.
Speaking of Bankia, it's down more than 40% today after it received a €15.5 billion recapitalization plan of its own over the weekend. The kicker though, is that part of the deal dictates that Bankia shares be devalued to just one euro cent as debt is converted to equity. Once again, it's an example of shareholders and debt holders being put on the line as opposed to an all-out government bailout.