Coming to a bank near you: the hairdressing salon.
by George Hatjoullis
The report of Christine Lagarde‘s pre-IMF meeting speech makes for disconcerting reading. One sentiment in particular is very notable. She states that:
“the priority must be to continue to clean up the banking system by recapitalising, restructuring or – where necessary – shutting down banks.” http://on.ft.com/16TIAWq
Shutting down banks! This may mean more uninsured deposit haircuts. Her reasons are very sound. The broken banks have stopped the easy money policies of central banks from filtering down to loans to small and medium size businesses. This is holding back a debt-fuelled recovery. The value of a debt-fuelled recovery is somewhat questionable but as this is the prevailing ideology it explains her concern. The monetary stimulus mechanism is broken in many economies. Broken banks have been the case for around 20 years in Japan and Abe is only now giving the matter some serious consideration. However, as my previous notes have hinted ,he needs to do this with courage and care and I am not persuaded yet that he will succeed. The other area of great concern is the eurozone.
Ironically the eurozone has the perfect vehicle for direct recapitalisation of banks; the ESM. The question is how will it deploy? The problem is the Berlin obsession with moral hazard, which is fast becoming a pain. My own approach to moral hazard as a father is to bail out the child first and then put in place mechanisms to stop the crisis recurring. It is a slow and expensive process but humane. Berlin would presumably regard me as an indulgent father. The Berlin approach is to use the pain as part of the reformation process. By implication, the more pain the more effective the lesson.
The use of ESM funds for direct recapitalisation of failing eurozone banks may thus not be consistent across member states. It depends on who needs the lesson.It has not been so far. The treatment of the Republic of Cyprus has been markedly more harsh than others and previous blogs have explained why this is the case. Nevertheless even if Cyprus is not a template it is certainly a precedent. There may be more haircuts of uninsured depositors so take a close look at where you have excess cash and habitually do banking business. Is a hairdressing salon opening up? They do one style and it is a number one all over.
Other bloggers and tweeters are now picking up what i pointed some time ago (see http://bit.ly/12frxgD and later blogs).The debt sustainability report is a work of fiction. I did not need to see the report to conclude this but as I am not (yet) part of this self-supporting clique I guess no one noticed or cared. The only new information that I have found is that the amount raised from haircuts is 10 billion euro and not 6 billion. The loss of liquid wealth is even greater than I had allowed and the economic outlook that much worse.
The economic case for Cyprus to exit the eurozone is even more compelling. Not that it seems to matter to anyone except Cypriots.