Chief Strategist Ronald Doeswijk, on what can be learned from the last ten days.
There are five key lessons to be learned from the 11th hour deal that Cyprus struck with the international lenders to secure its EUR 10 billion bail-out, says Ronald Doeswijk.
1. Deal was the best of a bad bunch of solutions
First, he says, the deal is not ideal but it is the best option from a bad set of potential solutions. “In the last week, as in the whole debt crisis, there have been events where there are only bad solutions on offer,” he argues.
This “least-bad” deal is structured so that the unacceptable plan to levy depositors with savings of less than EUR 100,000 that was included in last week’s initial proposal—and which was voted down by the Cypriot parliament—has gone.
Instead, the weight of the bail-out rests on richer depositors in the country’s two main banks, with more than EUR 100,000 in their accounts, and senior bank bondholders.
These pressures mean that there are no simple solutions left for future flare-ups in the eurozone debt crisis—and such flare-ups are inevitable. “This will not be the last choice between bad solutions. And a bad solution always brings the risk of a final break up of the eurozone, either directly or indirectly. Also, politicians have not always shown great awareness of unintended consequences,” he cautions.
2. EUR 100,000 deposit guarantee repaired but doubts will linger
The second lesson is that politicians have realized that it was a mistake to threaten the eurozone-wide EUR 100,000 deposit guarantee. In the proposal that the Cypriot parliament rejected last Monday, deposits with less than EUR 100,000 were facing a 6.75% haircut.
In the new deal, the EUR 100,000 guarantee is being honored. “In that sense, you could say that things have only changed marginally in the last ten days,” says Doeswijk.
And yet. Only a week ago, Europe’s policymaker elite were prepared to plunder small savers’ deposits. That’s a difficult cat to get back in the bag. “People have been made aware that the rules may change from today to tomorrow,” says Doeswijk.
3. Contagion risks in the short term are small: bank runs unlikely in Spain & Italy
Even though Spanish and Italian savers might thus be alarmed by the planned deposit grab in Cyprus, Doeswijk is not expecting bank runs in either country. That’s Doeswijk’s third lesson. “We still think contagion risks are small in the short term,” he says. “People will see Cyprus as a special case.”
That said, he acknowledges his concern about a possible restart of the silent bank run in Spain: “it’s a key issue,” he says. In Spain, money flows out of banks recently reversed: people have been putting money in again. Now, the worry is that, prompted by Cyprus, outflows will start again.
4. Bondholders continue to be at risk
The fourth lesson is that bondholders are now more at risk. As part of the Cyprus deal, the senior unsecured debt of Laiki Bank looks set to be completely wiped out, while senior bondholders of Bank of Cyprus face a haircut. “Senior bank debt holders will bleed,” says Doeswijk. “That is good in the long term.” Why is this good? “Sometimes risk has to materialize to prevent moral hazard,” he says. “You can’t use taxpayers’ money every time.”
5. Focus to shift back to political instability in Italy
The fifth lesson concerns the next steps in the broader eurozone crisis. While Cyprus gets used to its new normal—a shattered business model, a drastically shrinking economy and higher levels of debt to GDP—Doeswijk believes that the spotlight is likely to shift away.
It is not that this deal solves Cyprus’s problems. “But we believe that if Cyprus implements what the Troika is telling it to do, it will receive another bail-out if needed,” he says. “A eurozone exit is too dangerous.”
Where will the spotlight come to rest? Doeswijk suggests Italy. “Political instability in Italy could worry financial markets,” he says. After all, there is no stable government. And fresh elections are possible within a few months. “Are the new policymakers willing to put forward enough reforms to satisfy the Germans?” he asks.
That is unlikely to be the only negative taking the spotlight away from Cyprus. The dire state of the eurozone economy will also be competing for attention. “We have to see how the economy does in the months ahead. Data from France has been very bad,” he notes.
Still, despite the flare-ups, the most likely scenario is that, with the backstop of the ECB’s OMT (outright monetary transactions) and softened austerity, politicians will gradually push through economic reform. “In those circumstances, we may be able to avoid a test of the conditionality of the OMT, which we believe to be truly conditional,” says Doeswijk
Ronald Doeswijk es el estratega jefe en Robeco. Es un veterano profesional de económicas y asignación de activos. Desde 1996 a 2010, fue estratega de inversiones en IRIS, la operación de análisis de inversiones de Rabobank y Robeco.
Ronald tiene fuertes vínculos con el mundo académico. Es el autor de varios artículos sobre estrategia y asignación de activos que han aparecido en publicaciones como Journal of Portfolio Management, Journal of Wealth Management, International Review of Financial Analysis y Journal of Investing. Es uno de los autores académicos más descargados del mundo.
Cuenta con un post grado en Económicas por la Erasmus Univeristy Rotterdam. Obtuvo además el doctorado en 2007.