FX: Cyprus deposit raid a reason to sell the euro… for a day or two

Something about the government confiscating bank deposits speaks to our primeval fears. Honest people who believed in their leaders will be robbed by their governments, it feels like a sign of society crumbling.
Without question it’s a disaster in Cyprus. There will be panic and protests and disorder. There will be a long-lasting run on the banks.
A good comparison is Argentina, where in 2001 the government devalued the value of the peso and forcibly converted dollar deposits. Twelve years later, the banking system remains in tatters because people refuse to make deposits — preferring the safety of the First Mattress Bank of Americas. And without deposits banks can’t lend and growth languishes.

Bank run on deposits could it happen in cyprus
A lineup outside a bank in Argentina in 2002

Another name for a bank is a trust. Once trust in the system is destroyed, it can take a generation to repair.
It all sounds dreadful if you’re in Cyprus but lets put things into perspective. The population of Cyprus is 1.1 million  –which seems like a lot of you’re a Cypriot politician and they’re chasing you with pitchforks — but it represents 0.3% of the population of the eurozone.
What happens in Cyprus doesn’t matter to the European economy and it doesn’t matter to the vast majority of Europeans save for a few very upset Russian tax evaders.
On Monday, the euro will fall on fears of line-ups at banks elsewhere in Europe with honest citizens draining accounts and terrified their country could be next.
Is that a legitimate fear? I don’t think it is. I think European are more cleaver than that.
Citizens Spain, Italy and Greece have been tortured by taxes and austerity. Moreover, the heavy lifting is already done and government finances are improving in most of the bloc. I might be wrong but I can’t imagine a cue forming outside of Santander or even embattled banks like Monte Paschi and Allied Irish.
Newscasts will broadcast sensational images at banks in Cyprus for the next few days but don’t tune in. Instead watch for signs of panic elsewhere in Europe. If it doesn’t materialize, buy the dip in the euro.


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