Ad Hoc Commentary – Schauble thinks we are blind

“If you look at Greece, it’s not a major part of the economy of the eurozone as a whole. Most participants of financial markets are telling us that markets have already priced in whatever will happen. You can’t see any contagion,” [Wolfgang Schauble, Germany’s finance minister said.]

“We will not settle for another version of extending and pretending, that gives Greece’s debt-deflation spiral another twirl,” [Yanis Varoufakis, Greece’s finance minister] said.

The Greek situation had only went from bad to worse since our last post two weeks ago:
“European leaders should not throw caution in the air. Brussels should plan for a managed Grexit.”

Mr Schauble either thinks we are all blind or he was probably quoted out of context. Of course there would be contagion. We remember the haircut to Greek sovereign debt, also known as Greek PSI, to private bondholders in 2012:

The Greek PSI directly led to the Cyprus banking crisis:
“Until recently, Cyprus was a prosperous island economy with robust tourism, shipping and a significant international banking sector. Its big banks, like others in Europe, attracted large overseas deposits and invested heavily in sovereign debt. In Cyprus, much of the money came from Russia and was invested in Greek bonds.”
“Meanwhile, Greece was in the throws of a financial crisis, and in February 2012, European Central Bank and European Union, along with the International Monetary Fund, imposed a 53.5 percent haircut on private bondholders—for all practical purposes, that sunk the large Cypriot banks and manufactured their crisis.”

The Cyprus banking crisis ended with a 47.5% bail-in:
“The ‘Troika’ of creditors have agreed the final deposit levy on Cypriot accounts will be 47.5 percent for shareholders, bondholders, and depositors with more than 100,000 euro in the two largest banks.”

The bail-in model piloted by Cyprus probably led to the paradigm shift from taxpayers-bail-out-regime into a private-bail-in-regime:
“…“We are at a very delicate phase when Europe’s banking system switches from a bail-out regime into a much tougher bail-in regime, and Austria has just thrown this into sharp relief,” said sovereign bond strategist Nicholas Spiro. The biggest bondholders are Deutsche Bank’s DWS Investment, Pimco, Kepler-Fonds and BlackRock. The World Bank also owns €150m of Hypo debt…”

It should come as no suprise that Austria is leading the change:
“…Bank deposits in Austria will no longer be protected by the state in the event that a bank fails, according to new legislation which will come into force in July…”

We just need to remember the Credit-Anstalt Collapse of 1931 and the insight that our greatest fears are our past:
“…In May 1931, a Viennese bank named Credit-Anstalt failed. Founded by the famous Rothschild banking family in 1855, Credit-Anstalt was one of the most important financial institutions of the Austro-Hungarian Empire, and its failure came as a shock because it was considered impregnable…”
“…The Austrian government stepped in to guarantee all the bank’s deposits and other liabilities—but that only brought the government’s own creditworthiness into question…”

Back to Greece, it is no surprise that the Americans, having been through Lehman’s failure, are correctly warning that there will be contagion in the case of a Greek sovereign debt default. Given the shift to a bail-in regime, deflation is more likely to sweep across Europe post-Grexit. One day in the very near future, both hedge fund managers and nice little old ladies will realize that bail-ins makes ‘safe’ bank deposits more risky than equities and farmlands.

Good luck in the markets.