Just the Same, Only Worse

So, the troika and Cyprus came to an agreement Sunday night. The self-congratulatory press conferences went on until 2 AM.

The just the same part is essentially the same on that the troika presented to Cyprus 10 days ago (before the disastrous plan to tax everyone).

• The second largest bank can’t be saved. It’s “good” assets will be transferred to the biggest bank (along with all of the liabilities for money it owes to the European Central Bank). The remaining positions will be wound down.
• The Cypriots pony up 40% of uninsured deposits (those over 100K). Hopefully most of that is Russian money, and hopefully most of that is in turn illegal Russian money.
• The Eurozone gives them back about 2-3 times that amount to stabilize their financial system. This isn’t even twice as much as they’ve already received, so I wonder if it’s enough.
• The legislature in Cyprus still needs to pass this.

The only worse part:

• Cyprus now has capital controls.
• We still don’t know if there will be bank runs this week.
• The Cypriot business model, catering to Russians, and the prosperity that went along with that is probably dead. Russian money is now going to Latvia. That’s not necessarily a recipe for a problem, but it is possible that their financial system could be overwhelmed just like Cyprus’ was.
• There are effectively two Euros: the one you use just about everywhere, and the one you have to use in Cyprus because of capital controls. So much for European monetary union.
• There’s a precedent for suggesting that bank deposit guarantees can be readily overturned.
• The troika looks like a bunch of amateurs. The pizzas getting delivered to the meetings late the night before an ultimatum came due didn’t help.
• The Russians are surer than ever that no one in western Europe likes them.

And … here’s a chart from Eurostat that indicates where we might next see trouble:

We’d better hope that the Cypriot financial problems (too much Russian money reinvested in too much Greek debt) were unique, because if not, there are a bunch of bigger name places in trouble.

BTW: If the U.S. were in this chart, it would be in the same block as Cyprus.