What do you do if you wake up one morning and hear that your bank account and those of your friends and family members are frozen? You probably panic but that won’t do you much good so you commiserate with friends and family and wait and wait until the banks reopen and you can get your money out.
That’s the situation in Cyprus where banks reopened last Thursday after a 12-day hiatus. But depositors can’t empty their bank accounts and many have lost money. Large deposits over 100,000 euro ($128,200) have suffered losses as much as 60% and smaller insured deposits are subject to maximum withdrawals of 1,000 euros a day as result of the deal the Cypriot government cut to receive a 10-billion-euro bailout.
“The haircuts or asset seizure, which is really what it is, for folks who have more than 100,000 euros is shocking,” says The Daily Ticker’s Henry Blodget.
It could have been worse. The original Cyprus bank rescue plan would have imposed losses on accounts with less than 100,000 euros. Although that didn’t happen the fact that the idea was circulating will prompt “people to take their money out and ask questions later if there is any sign of weakness in their bank or…in their country whether it’s Spain or Italy or any other country in the EU, ” says The Daily Ticker’s Aaron Task.
Adding to those fears, says Blodget, is the fact that in Cyprus only a couple of banks were in trouble but the capital controls and haircuts were imposed across the banking system.
Cyprus is just the latest country to be bailed out in the eurozone, after Greece, Ireland, Portugal and Spain. This begs the questions: what is the future of the eurozone and what is the value of the euro?
“A euro in a Cyprus bank is worth less than a euro in any other bank in Europe,” says Blodget.
“There is the German euro and every other euro,” says Task. He expects a “huge backlash against Germany.”
Blodget calls the current eurozone “an unworkable situation” but doesn’t necessarily foresee its dissolution.
“The idea that we’ll come to some point that it gets fixed or resolved doesn’t seem realistic…it will just be rolling crises.”
And “each time the can gets kicked down the road it seems the road gets shorter and shorter,” says Task.
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