Follow the Money

The ECB confirmed what the recent anecdotal reports hinted at, namely that deposits have been leaving Cyprus even before the crisis reached the fevered pace a couple of weeks ago.  

Specifically, earlier today it confirmed that roughly deposits fell by about 1 bln euros in February after a similar draw down in January.  In fact, since last May, there has been only one month in which deposits have not fallen. As of the end of February, the ECB data shows there were still 47.4 bln euros of deposits in Cyprus banks. 

For investors who followed Cyprus closely, since the haircut on private sector holdings on Greek sovereign bonds, the island's banks have been vulnerable and its business model dead in the water.  The decline in deposits reflects this realization.  We did not follow Cyprus particularly closely, but our analysis pointed to coming storm in December 2012 and in January we warned that the risk of an exit from EMU was greater than the market had realized. 

There has been further deposit outflows here in March before the bank holiday was declared.  This too may not be a case of conspiratorial intrigue.  The election was the last hurdle to some raw deal.   However, there does seem to be some capital leakage during the bank holiday, which ended today.  There was some approved transaction to pay for some imports, for example.  There also appears to have been some other outflows not related to deposits or bank accounts per se. 

Away from Cyprus, the ECB reported that deposits in Greek banks rose by almost 3.5 bln euros to 171.04 bln in February.  The 6% increase this year now lifts the deposits above year ago levels.  Deposits also rose in Slovenia, Luxembourg and Spain.  Deposits were unchanged  in Portugal and slipped 0.7% in Italy.   

Lending is a different story.  The ECB's money supply report showed that private lending fall for the tenth consecutive month in the euro area.  This seems to be a reflection of more restrictive lending terms and the destruction of demand by weak economic conditions.  Lending by Greek and Spanish banks fell, but they rose 0.3% in Italy.  

Meanwhile, Italian and Spanish banks continued to buy sovereign bonds in February.  In Italy,  bond yields bottomed in late January and trended higher through Feb and March.  Spanish bond yields rose from mid-January into early February, and then fell again, and new mid-March were at new multi-month lows.  Spanish banks bought 7.88 bln euros of sovereign bonds and Italian banks bought 4.79 bln.  Of note, French banks bought 11.85 bln of sovereign bonds, almost as much as Spain and Italy combined.