NOMURA: Europe Needs To Do 3 Things To Fix The Crisis, And Right Now It's Doing None Of Them
There's a widespread feeling that they're not very good at it, and Cailloux agrees.
First, he disputes the idea that Cyprus is too small to be systemic. It's not about size, but rather precedents and response.
And Cailloux identifies three things that leaders need to be doing:
Regarding how to regain control, at the risk of sounding repetitive, we would like to stress the importance of a number of conditions that need to be met to restore confidence in depositors following bank runs: 1) eradicate doubts that losses on deposits will occur by giving the impression that 100% of deposits are safe and cash is safer in banks than under the mattress; 2) the provision of a credible regime shifting policy response; and 3) that policy makers speak in unison. Even more importantly, we found that size is not the main driver and that a small shock can have a significant impact on the rest of the system, as illustrated by bank runs in the US during 1932 and 1933.
The first one is obviously already something of a failure. We just saw depositor haircuts, and even though the tax on uninsured depositors never went through, the fact that it was entertained and agreed to by other Eurozone finance ministers was shocking.
On the latter two, yesterday was a good example of where Eurozone leadership has been falling down, both inside and outside Cyprus.
Inside Cyprus there's the pointless own goal of continually changing when the banks are going to reopen. First the plan was to reopen them today. Now the plan is for some kind of reopening on Thursday. Everytime this type of thing is done, the system grows more fragile.
And then of course there were the comments yesterday from Eurogroup chief and Dutch Finance Minister Jeroen Dijsselbloem. First he said that the Cyprus bailin (creditor haircuts) would likely be used as a template in the future. Then the Eurogroup put out a statement saying Cyprus was not a template.
Cailloux's take is basically that Dijsselbloem was expressing the standard Dutch view of these things, which has been to favor a harder line on creditors. The problem was it wasn't clear for whom he was speaking, and certainly although this may have been his view, it wasn't the view of all Eurozone finance minister, among whom he is the current leader.
And so here's the problem with Europe. It's not Cyprus per se, but what what Cyprus revealed. We already knew that the monetary structure was flawed. Now we're seeing new cracks forming in the political structure.