UK citizens should keep deposits in Spanish, French, Italian and Portuguese banks to a minimum warns FundExpert’s Brian Dennehy

26th March 2013

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UK citizens should reduce their eurozone deposits to the minimum required to pay bills says FundExpert’s managing director Brian Dennehy. He warns that following the Cyprus negotiations the Euro 100,000 guarantee is now a ‘fiction’. Cypriot banks will closed until Thursday as the Irish Times reports.

Dennehy, who is also the managing director of IFA Dennehy Weller & Co  says that UK savers and investors must be very wary if they have deposit accounts or other financial interests in Spain, France, Italy and Portugal, despite the fact that small depositors were, ultimately, not penalised in the Cyprus settlement.

In a note, Dennehy writes: “The reality now is that all depositors throughout the eurozone are exposed, and they get it.  One client was in Spain the weekend before last, and after the Cyprus announcement she found queues forming at ATMs, with many closed or limiting withdrawals – she had never experienced anything like this before.  This is a glimpse of the (very near?) future.

“Bank runs are viral events.  Recall the Northern Rock queues in September 2007, despite some of us (certainly us) being vocal on the point that the Government would step in with guarantees. That was then.  But events have since moved on to such an extent that account holders must remind themselves that deposit guarantees are only as strong as the sovereigns providing them.”

“Bank runs are not a construct of economists.  They are real and ugly, and when they occur either banks go bust (and depositors lose money) or Governments provide guarantees, at least to some extent.  In the case of the eurozone it is clear that the 100,000 euro guarantee is a fiction, and whether it is applied is at the discretion of the Germans.  And God help you if your deposit is larger.”
Dennehy says that the next big risk is controls on capital. The BBC reports that Cypriot banks will put weekly withdrawal limits in place.

“The powers that be in the eurozone are not (completely) stupid, they know that depositors will vote with their feet, withdrawing cash for safer havens, possibly outside their country, or even just under the mattress.  The authorities must stop this because, as we said above, bank runs are viral, ugly events that build a momentum of their own. So in Cyprus we must now expect capital controls.  This will probably take the form of limiting the amounts that can be withdrawn from accounts.  It could also restrict internet access to accounts and the ability to move cash outside Cyprus.  Confidence will then fall even further, and the ending is very unpredictable, but that doesn’t concern us here.  What does is how this might impact on other eurozone countries.”

Dennehy then considers three EU countries where, he says, UK savers tend to be most exposed.

He says: “An economy in recession, the burden of unsustainable debts, a flakey banking system, and the threat to sovereignty by EU and bullying, are key problems shared by many countries.”

He lists them below –

Italy?  Last Summer, when ECB head Mario Draghi, said he will do “whatever it takes” to save the euro it was the end of the beginning of the eurocrisis. But the Italian election result gave a glimpse of the beginning of the end of the eurozone, as the voters gave the clearest indication yet that they don’t believe mainstream politicians can be trusted to solve the eurocrisis.  As The Economist said “This result is a disaster for Italy and for Europe”.

Spain?  Beset by still rising debt, corruption, and 26 per cent unemployment (55 per cent for young people) it is strange that the Spanish have, largely, been quiescent.  The politicians insist the worst is past, but lack of trust may become evident in coming weeks by simply measuring the emptying of Spanish bank accounts.

France?  The 2nd biggest economy in the eurozone, but opinion is increasingly negative, with talk of France being the next Greece, as extraordinary as that may seem.  The evidence is not pretty reading.  French workers do the fewest hours of any in the developed world; unit labour costs make them horribly uncompetitive; once a significant exporter, it is in a long term downtrend, and the trade balance is negative; profits of French companies are at 60 per cent of the European average.  Even if the ECB can support Spain and Italy, can they really support France too?  At what future cost?  How will the Germans feel about the inflation outlook as the printing presses are cranked up even more?

He adds: “Individuals in these countries, particularly the wealthy one’s receiving advice, will increasingly be taking action to protect their deposit monies – the risk of this gathering momentum, and obviously becoming a bank run, is very real.”

He then makes the following suggestions. 

Dennehy adds: “More generally UK savers must remember that when you deposit money with a bank you lend it to them, it becomes their asset to do with what they will (to a very large extent).  It is no longer your money, you are simply owed the money by your bank, and they may or may not be able to repay it at the time of your request.”

 

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