Banking Crisis; Market, Currency Fallout
QUEST: The market numbers tell their own stories today. Start with the European markets, where you have the FTSE was down half a percent, Frankfurt DAX, Paris CAC 40, Spain was off 1.25 percent. The banking sector was very badly hit. Barclays down 4.5 percent, UniCredit was off 3.5, SocGen in the Paris market down 3.5. All of the same reason, because the fear is how this will affect the banks and the contagion that it could move into other markets, like in Spain. What happens, for example, if one of these -- the next country that may require a bailout? Will the Cyprus formula of deposit tax levy confiscation be used for that? Look at the markets in New York, down just 18 points, but as this graph shows, we were very sharply down at the beginning, off nearly 100 points. Those losses have trimmed right the way through the session, even going positive just a short while ago. So, that is the Cyprus effect, but it's obviously eliminated as the session's moved on. Spain and Italy not only saw their stock markets hit hard, but they saw bond yields rise four basis points to 4.96 and 4.63, just a fraction up there. So again, we're starting to see the transmission of the worries. And if you've done equities and you've done bonds, then next, obviously, it has to be currencies. And whoops, there she goes. Euro down against the dollar, a slight recovery midday, but overall, you can see exactly the reason. If you think this is all just a storm in a teacup, to quote one banker on another occasion, you'd be seriously wrong. Paul Donovan says Cyprus's package is only -- is the only one that a politician could dream up when economists would do something completely different.</s>PAUL DONOVAN, MANAGING DIRECTOR OF GLOBAL ECONOMICS, UBS: The word "disastrous" springs readily to mind. Someone forgot to mention to the euro group that monetary unions, when they die, die because of bank runs. And bank runs happen when people have no confidence that they're going to get their money back. And today, we have a situation in Cyprus where people have no confidence they're going to get the full value of their bank deposits back. This is not a good situation to be in.</s>QUEST: And this is exactly what they avoided successfully in 2008 and 2009 with Lehman Brothers, Bear Stearns, and with Northern Rock.</s>DONOVAN: Well, indeed. And the issue here is that people who thought their deposits were guaranteed are now finding they're paying a tax on those deposits. Now, calling it a tax is a polite fiction. Part of the deposit has, of course, been seized. And what that means, of course, Richard, is that the value of a euro in the Cypriot banking system is worth less than the value of a euro elsewhere in the monetary union. This is not supposed to happen in a monetary union.</s>QUEST: Why would they take the risk?</s>DONOVAN: Because they're politicians, not economists. And it's a sad fact of life that whilst politicians rather than economists run things, we will get economic errors being made with alarming frequency.</s>QUEST: How far back does this take us into the crisis?</s>DONOVAN: What this has done, I think, is raise the cost of any future crises that come out, because now if there is a wobble of insecurity in a banking system anywhere in the eurozone in the coming months and years, people are going to be worried that they will be treated the same way that the Cypriots are being treated. And if I say to you that there's a ten percent chance that you might lose ten percent of your bank deposits, how happy are you going to be to keep your money on deposit in a bank? It increases the risk of panic in the event of future crises. And that's where the real damage from this deal, I think, is coming.</s>QUEST: Particularly since we still have the potential for some form of deal, even though Spain's banks have been recapitalized, there is still the potential in, say, Spain, for needing EU central -- ESM money.</s>DONOVAN: In November last year, the European Union made an enormous step forward in the eyes of economists in admitting that they needed to have a banking union alongside their monetary union. Now, economists have been saying this right since 1992, so of course, we're pleased that it's only taken 20 years for politicians to listen to us. Now, we seem to be moving away from that. This is nothing like a banking union. This is penalizing one part of the eurozone. It's certainly not providing deposit guarantees, because those are being negated by this tax or levy or whatever it's going to be called, this raid on bank deposits. That, I think, is a really fundamental problem.</s>QUEST: Paul Donovan of UBS with the blunt language that gives you a good indication of why this is such a major development that's taken place in the eurozone crisis. At a joint press conference between Angela Merkel of Germany and Francois Hollande of France, along with Jose Manuel Barroso, Fred Pleitgen is in Berlin for us tonight. Interestingly, the three of them were talking about competitiveness, and none of them wanted to really grasp the nettle of why they'd done this on Cyprus.</s>FREDERIK PLEITGEN, CNN INTERNATIONAL CORRESPONDENT: Yes, you're absolutely right, Richard, that was exactly the case. And the other interesting thing about this whole Cyprus bailout is that it is very different than many other bailouts. And one thing that's very different is that with all the other bailouts, you always had a German handwriting on them, and you always had the German government making very clear that they were, maybe not dictating the terms, but certainly influencing them and writing them, to a large extent, in those other bailouts. This time, the German government is saying seizing people's bank accounts or parts of their bank accounts, we have nothing to do with that. The German government is saying they would've hoped that it could have been done without the Cypriot government seizing part of those bank accounts. In fact, Angela Merkel was very, very vague at that press conference that she had with Francois Hollande and Jose Manuel Barroso. Let's listen in to what she had to say.</s>ANGELA MERKEL, CHANCELLOR OF GERMANY (through translator): Usually in our political functions, we see to it that the euro as a whole is rendered stable. We've done that in the past, we're going to do that in the next years to come.</s>PLEITGEN: The German government, of course, Richard, in the past has taken a lot of heat for the austerity measures that were imposed on Greece, also the ones that were in play with Spain, as well. So, in this case, the Germans are saying we have nothing to do with the tough conditions that are there now. But they're also saying they believe that all of this could have a calming effect on the market if, in fact, that law is passed, Richard.</s>QUEST: Fred, you answered the question. So, if it wasn't the Germans, who was it?</s>PLEITGEN: That's a very good question. The Germans were actually asked that today, and they were saying they believe that a lot of it came from the European Central Bank. They also said that they believe that some of it actually did come from the Cypriot government itself. Certainly, some of those terms were negotiated. But there's a lot of political discussion about that as well, about that haircut that private people are supposed to have to take, and there's a lot of discussion within Angela Merkel's coalition government, because it is something that, of course, also is highly detrimental to the confidence of savers here in Germany. But it goes to the point where Angela Merkel came out today through her spokesperson and made absolutely clear that German savings accounts are safe, that the German government stands by those. The last time she did that was in 2008 after the Lehman collapse. And certainly now, she's been compelled to do that again, so that shows how worried the Germans are about all of this and how a big a discussion all of this is within the German government, Richard.</s>QUEST: Fred Pleitgen with the German side of this story tonight, and you and I are now starting to see exactly why this small country on the southern periphery of Europe is having such an enormous effect on the eurozone crisis tonight. A Currency Conundrum: apart from Cyprus, which other country adopted the euro on the first of January 2008? Was it Malta, Slovenia, or Greece? The answer later in the program. The dollar is flat against the pound. Look at the euro, up against the yen. Those are the rates --</s>QUEST: -- this is the break.