ALBERT EDWARDS: The Troika Has 'Exponentially' Increased Fears About Bank Deposits All Over Europe

His prediction: Yes Europe is going to break up and yes, Cyprus is a worrisome template.

The Troika have managed to exponentially increase concerns on how safe retail deposits are in the eurozone. It matters not that the final Cypriot bailout plan did not touch smaller savers unlike the original proposal of a 6¾% tax (haircut) for ALL deposits under ?100,000 in ALL banks (including foreign bank subsidiaries).

The fact that this plan was originally sanctioned, despite deposit insurance, will have shaken small saver confidence to the bone. It certainly has shaken my confidence. I know from first-hand experience the extreme difficulty for a European citizen to open an account in another European country ? it is nigh on impossible for the man in the street. If ?Joe Sixpack? in Spain or Italy or wherever is thinking the Troika are circling their country in the future, it is entirely rational, as Mervyn King suggests, to panic! (The Bank of England Governor, Mervyn King once said it was not rational to start a bank run but rational to participate in one once it has started.) But euro-Joe Sixpack is left with the choice of stuffing his money under the mattress or buying ?safe? financial assets (maybe overseas mutual funds or gold?), or indeed spending the money on goods and services.

Meanwhile, in a story posted by Deutsche Bank Bernhard Speyer raises similar points:

The ramifications of this decision by the European institutions are no less serious, as it has undermined the agreement to create a banking union that they had just lavished themselves with praise for achieving. For by creating the impression that deposits are no longer safe as they strived to solve the financial problems of the Cypriot state, they have revived the vicious circle of fiscal and financial instability – the so-called “sovereign-bank nexus” – that the banking union is specifically designed to eradicate.

As became evident subsequently, it would have been possible to devise a bailout package that excluded small savers the first time around. Back when they rescheduled Greek government bonds the EMU states had already committed the “original sin” of stripping the aura of safety from an asset class previously regarded as secure – the negative repercussions of this decision are still apparent, although the policy was reversed subsequently. It is puzzling that the same mistake has been repeated with deposits that are insured.