Europe is currently scrambling to structure a deal to save the Cypriot financial system.
Without a doubt, the most controversial aspect of the bail out proposals has been the condition that bank depositors would be hit with a levy on their accounts.
“This is a nuclear war on savings and wealth – something that will likely crush animal spirits,” wrote Jefferies’ David Zervos.
Bank deposits are considered sacred, even more sacred than money market funds. And back during the financial crisis, panic ensued when one money market fund “broke the buck.”
“I guess I’m a little surprised at how complacent the markets are on this,” Zervos said later on Bloomberg Television.
…and the Cypriots, perhaps bullied by some creditors, then decided to clobber all the banks’ depositors, even the insured ones.
This was ingeniously loopy. Cyprus is odd, because virtually all its banks’ liabilities are deposits (as opposed to longer-term bonds). Yet, of the 147 banking crises since 1970 tracked by the IMF, none inflicted losses on all depositors, irrespective of the amounts they held and the banks they were with. Now depositors in weak banks in weak countries have every reason to worry about sudden raids on their savings. Depositors in places like Italy have not panicked yet. But they will if the euro zone tries to “rescue” them too.
We have yet to hear about depositors closing their accounts in a big way in other countries. But if they did, it could be a disaster as deposits are one of the pillars of the financial system.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.