Cyprus “success” preludes something bigger in European banking

Agora Contributor: Ilias Siakantaris

At first, it looked anything but successful. Both Brussels and Nicosia seemed hopeless, had shot themselves in their feet, steamrollered over taboos, destabilised capital flows - created a mega blunder.

Yet the Cyprus Gaffe (or Cyprus Rehearsal, or Cyprus Scare) is successful in having produced one sure effect: To make you sweat and scale down your accounts to less than 100K, then run to find the most secure refuge possible for your (depreciating) savings.

At first you will go for the core-Eurozone Zuperbanks. Soon enough you will get accustomed to the offers of deposit protection schemes - and be willing to pay heavily for them. These products, of course, will be credibly available only in a handful of banks at the “core of the core”. In the next few months, Eurosystem Target 2 flows (reflecting increasing capital flight) will confirm this.

So, rest assured, “the system” is not after your deposits, at least not all of them. It is only prodding you to move your savings and/or to wilfully hand over a good chunk of them to buy protection against your own Cyprus-induced fear.

Gradually, the masses will learn to disregard the negative interest effect on their savings. A new vast pool will open up to fund the new and bigger banking consolidation. It's an “inverse financial transaction tax,” only on a vastly larger scale. This “tax” will go to the banks, those few that will "deserve" to survive. They will be the ones that will meet their Basel III requirements faster than the rest.

They will form a new landscape for European Banking. A more “competitive” one, closer to the US model (http://www.ft.com/intl/cms/s/0/dbe21db2-058d-11e2-bce8-00144feabdc0.html#axzz2OJIX6XTw).

After absorbing the valuable bits of smaller lenders, a handful of less leveraged banks (http://topforeignstocks.com/wp-content/uploads/2010/07/europe-banks-capital-to-assets.png) will be the predominant players for a vast multi-cultural and multi-economy region. Banking union will become easier to implement amongst fewer players.

In the wake, another European nation is left in shock, looking at several lost decades after having its plug unceremoniously pulled.

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