For deposits in Cyrpus larger than 100,000 euros, one euro in the bank is not worth one euro in hand anymore. Brussels and Cyprus authorities have finally arrived at what seems to be a definitive bailout deal, and big deposits are going to be axed. I believe the same fate might be suffered by investors who hold their deposits in insolvent banks within the euro periphery.
Let's first review the main characteristics of Cyprus' deal to see what has already been done. Then, let's review two banks where deposits larger than 100,000 euros might be at serious risk: This two banks are The National Bank Of Greece and troubled Italian bank Monte dei Paschi di Siena (NASDAQOTH: BMDPF).
Cypru's Deal in Six Points
1) Brussels agreed to write a 10 billion euro check. The check will not be used to recapitalize Laiki, Cyrpus's second largest bank, nor the Bank of Cyprus (NASDAQOTH: BACPY), which is Cyprus's largest bank.
2) Laiki's shareholders, bondholders and uninsured depositors (with deposits over 100,000 euros) will cover the cost of Laiki's recapitalization. The bank will be split into a good bank and a bad bank.
3) The bad bank will be liquidated over time.
4) The good bank will merge with the Bank of Cyprus.
5) The European Central Bank (ECB) will provide liquidity assuring that banks will not run out of cash.
6) The Bank of Cyprus will also be recapitalized with full contribution from existing shareholders and bondholders. Uninsured depositors will suffer a still unknown one-off haircut. This one-off haircut will probably be around 40-60%. In exchange for the haircut, uninsured depositors will receive equity in the new banks. The actual size of the one-off tax will be related to how much money needs to be raised in order to achieve a capital ratio of 9%.
Next in Line
If the experiment that took place in Cyprus doesn't provoke a run across the Eurozone, we might see uninsured depositors in other European banks suffer haircuts (see point 6 of the Cypru's deal above). I especially worry about uninsured depositors at two banks: The National Bank Of Greece and Monte dei Paschi di Siena.
Monte dei Paschi di Siena, the world's oldest and Italy’s third largest bank by assets, just revealed that it lost several billions of euros in deposits in February. Monte dei Paschi is in an extremely precarious situation. After receiving an emergency 4 billion euro government loan this year, the bank announced heavier than expected losses for the financial year (up to 3.2 billion euros), hinting that it might need more capital. The bank's shares lost 43% of their value in the past 12 months, and they now trade at 35% of tangible book value. With not much capital left to lose, Monte dei Paschi, might be the next bank to haircut its uninsured depositors.
If you got scared by Monte dei Paschi then you should know that its shape is great next to Greece's biggest bank, the National Bank of Greece. The bank's shares lost 70% of their value in the past 12 months, and its results have left the bank with no capital to cover further losses. After restructuring its debt twice, Greece still has an unsustainable debt level. Even if the banks claim to have made money during the last three months of 2012, it lost 2.14 billion euros for the year, and the bank is simply broke.
In the case Cypru's deal comes out without much trouble for big banks at central countries (France and Germany), I think uninsured depositors at troubled banks in Greece, Portugal, Italy or Spain might suffer haircuts. Be prepared: it looks like the Eurozone crisis is far from over.
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