With this chapter of the European Debt Shuffle ending, I asked a few traders what the main takeaways were. Three points seemed especially relevant:
- Bank creditors face greater risks than taxpayers
- Depositors are unsecured creditors
- The free movement of capital is in doubt
There are two other conclusions you can reasonably make:
First, weak European banks could be in trouble - not just from retail depositors, but from corporate clients. Imagine this: you are sitting on the Finance Committee of a major European or U.S. company, and you learn that your company has, say, $25 million in cash sitting in a somewhat shaky Italian or Spanish bank.
What do you do? The events in Cyprus are a wake-up call: the call is, pay attention to where your cash is. Do you have a fiduciary obligation to consider the possibility that you may see your cash trapped in that weak bank and that you should therefore consider moving it to another, northern European bank? I would bet that many directors feel that they do.
Let me put it differently: if you were a director on the Finance Committee of a major corporation that had been forced to participate in a "bail-in" of your $25 million, would you want to appear in front of the full board to explain why you had not acted proactively?
Second, the proposed Banking Union may be a much tougher sell. Under the proposed union, the ECB would become the banking regulator for Europe. It is supposed to prevent just this kind of crisis--why move money from Italy to Germany when it's all under a single umbrella?
But is seems to me that a banking union has become a bit tougher. The perception of a banking union changes if the ECB has the power to force a bail-in. After all, they have explicitly stated that under a banking union the ECB would have the power to shut banks. Doesn't that imply the power to force a bail-in under this new paradigm?
Wouldn't national banking regulators be leery of turning over such power to the ECB?
Finally, I have gotten some push back to the idea that any bank that is wound down will now routinely force uninsured depositors to take losses. In most of the rest of Europe, banks are funded by debt and equity, rather than through deposits. Most of the bigger banks of Europe have very high shareholder equity compared to deposits; the opposite was the case in Cyprus.
This makes it more likely that any bailouts would be largely funded by haircuts for equity and debt, rather than cuts in bank deposits (unsecured creditors).
At least, that is the argument I get from some people. Maybe.
—By CNBC's Bob Pisani