What is bank run ?
A bank run (also known as a run on the bank) occurs in a fractional reserve banking system when a large number of customers withdraw their deposits from a financial institution at the same time and either demand cash or transfer those funds into government bonds or precious metals or a safer institution because they believe that the financial institution is, or might become, insolvent. As a bank run progresses, it generates its own momentum, in a kind of self-fulfilling prophecy (or positive feedback loop) – as more people withdraw their deposits, the likelihood of default increases, thus triggering further withdrawals. This can destabilize the bank to the point where it runs out of cash and thus faces sudden bankruptcy. (from wikipedia)
How Govt of Cyprus is avoiding the bank run?
The reason there probably won’t be Cyprus bank run is in these here capital controls. People can only take €300 from their account each day, so the emptying of accounts into socks just can’t happen in one go.
Here are some other important details from the legislation, designed to ruin media fun today:
– You can only leave the country carrying €1,000
– You can’t cash cheques
– You can’t transfer (much) cash abroad.
Officially, the controls “shall apply for a seven day period starting from the day of its publication in the Official Gazette of the Republic” – but there’s suspicion they might hang around for a bit longer.
What is amazing about Cyprus situation?
What’s amazing about this fiasco is that Europe’s leaders had almost a year to think about how to avoid it. Ever since Greece restructured its government debt, which made up a large share of Cypriot banks’ investments, it has been apparent that the banks would need a major recapitalization. With some preparation, Cyprus could have offered an excellent test of a euro-area banking union, in which the ECB would step in, force losses on the Cypriot banks’ creditors and quickly reopen the banks under new ownership.
As things stand, Europe is facing two extremely undesirable outcomes. Cyprus could fail to respond to the ECB’s ultimatum, triggering a banking collapse, an exit from the euro and all the unknowns of contagion that implies. Alternatively, Russia could produce most of the 5.8 billion euros ($7.5 billion) Cyprus needs to secure a bailout, and in exchange get a chunk of the country’s natural gas reserves and significant influence over a member state of the European Union.
If Cypriot banks are allowed to fail, the financial health of the entire euro area will be put at risk over the insignificant sum of 7 billion euros — the difference between the 10 billion euros that the euro area is willing to lend and the 17 billion Cyprus needs.
How will Cyprus situation affect Greece?
Greece is directly affected by the Cyprus crisis and based on some estimates this may chop up to one percentage point off GDP. Cyprus absorbs about 9 percent of Greece’s exports. Greece’s central banker said earlier this week the crisis may shrink Greek economic output by 0.35 percentage points this year.
“With the success of the Greek bailout programme already hanging by a thread, many signs show the recession is deepening with the prospect of recovery in 2014 fading”
Also, check out our article on what happens when a country defaults?
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