Albert Edwards, the lead strategist at Societe Generale, has added some typically forthright (and witty) comments on the latest developments in Euroland. By making explicit the fact that both uninsured bank depositors and all classes of bondholder have been required to take part in the rescue/liquidation of the two largest Cypriot banks, the troika (EU, IMF and ECB) has highlighted the fact that cash itself is now officially potentially an unsafe asset. He wonders also (as do I) how long it will be before a Eurozone country finally decides that remaining in the single currency is not worth the trauma that staying in involves.
Most economic analysis concludes, probably correctly, how much more costly it would be for either a creditor or debtor nation to leave the eurozone system compared to struggling on within it. Indeed for Germany, despite becoming increasingly irritated by having to dip their hands into their rapidly fraying pockets, the crisis in the eurozone has been accompanied by the lowest unemployment rates since before re-unification in 1990.
We won’t rehearse the very valid argument that Germany enjoys an extreme currency undervaluation within the eurozone umbrella. For the German worker with 5.3% unemployment it is a case of “crisis, what crisis?”. But the argument about whether a country will leave the eurozone will not ultimately be an economic decision. Leaving the eurozone will be a decision based on the politics of depression.
He then goes on to say:
Ben Bernanke would be proud of the Troika (IMF, ECB and European Commission). The Fed Chair thought he was being reasonably successful in using QE to suppress yields and drive savers out of cash deposits into riskier assets. The Troika in its dealings with Cyprus have gone one better. In the eurozone it is bank deposits that will now be considered by investors to be the risky asset.
The Troika have managed to exponentially increase concerns on how safe retail deposits are in the eurozone. It matters not that the final Cypriot bailout plan did not touch smaller savers unlike the original proposal of a 6¾% tax (haircut) for ALL deposits under 100,000 euros in ALL banks (including foreign bank subsidiaries). The fact that this plan was originally sanctioned, despite deposit insurance, will have shaken small saver confidence to the bone. It certainly has shaken my confidence.
Cash is of course alrady a risk asset in the sense that it is official policy to ensure that it delivers a below-inflation rate of return, now and for the indefinite future. The additional risk in the Eurozone after this week’s events is that uninsured cash deposits can now be forfeited and then locked in where it is by capital controls. Such an outcome is the logical end point of the general policy of financial repression that over-indebted governments find themselves having to pursue, but it is not something that most savers or investors have so far even begun to factor into their thinking.