Cyprus Deposit Seizures and Italy Payment Delays Highlight EU Recession

Dear readers, here are updates on topics we've covered this past week. (1). Italy seems to be ready to pay its bills. The president of Italy appointed a caretaker government last week to manage the country until new parliamentary elections are held. The caretaker cabinet approved a decree on Saturday to pay some €40 billion of the country's debts to private companies over the next 12 months. The decree is intended to provide needed liquidity to firms and help ease the bite of an almost precedented recession. But, the bill-paying decree was delayed while the Italian cabinet figured out how to fund the payments. The massive backlog of bills owed by Italy's public administration has been an ongoing major source of complaints by companies struggling to raise credit from banks facing increasingly tight credit conditions themselves. The government says settling the bills will provide desperately needed cash for an economy now stuck in its longest recession for 20 years. Italy has faced weeks with no party able to form a government while economic problem piled up. Mario Monti's outgoing government said on Saturday it was committed to not breaching the European Union's deficit ceiling of 3% of GDP. Monti last month hiked the 2013 deficit target sharply from 1.8% of GDP to 2.9%, bumping up against the EU 3% ceiling, after last year's deficit came in at exactly 3%. Public-finance data this year is not encouraging, with borrowing in the first quarter higher than the same period of 2012. (2). While Italy is striving to get its economic and fiscal houses in order, the EU economic and monetary affairs commissioner Olli Rehn took action making it clear that what happened to bank depositors is Cyprus is not a one-of-a-kind event. He said on Saturday that big bank depositors could take a hit under planned European Union law if a bank fails, but continued to insist that Cyprus's bailout model was exceptional. "Cyprus was a special case...but the upcoming directive assumes that investor and depositor liability will be carried out in case of a bank restructuring or a wind-down," Rehn said. "But there is a very clear hierarchy, at first the shareholders, then possibly the unprotected investments and deposits. However, the limit of 100,000 euros is sacred, deposits smaller than that are always safe." The European Commission is drafting a bank safety directive that would incorporate the issue of investor liability in member states' legislation. The price Cyprus paid for its €10 billion EU/IMF bailout last month was the extraction of heavy losses on bigger depositors. Initially it had also pledged to introduce a levy on deposits of less than €100,000 as well, even though they are supposedly protected by state guarantees. Cyprus gave up on that idea in the face of widespread protests. But, Rehn also said today that the European Central Bank should launch action to help boost the recession-hit Eurozone economy. ECB President Mario Draghi, at a press conference, called on the bank to consider cutting interest rates and to take fresh 'non-standard measures' - steps other than classic rate moves, such as government bond purchases or funding operations like the twin three-year loans it offered banks just over a year ago. Rehn said that high financing costs for companies, especially in southern Europe, were a major problem right now."Therefore, the ECB's talk on Thursday about both standard and non-standard measures is very important. ~~~~~ It's clear, dear readers, that the EU is searching for ways to fund member countries' bank liabilities, to find some way to lead the EU out of what has become a grinding recession - and at the same time find the money needed to provide survival funds for countries on the verge of fiscal collapse. While bank depositors know that their deposits in excess of rhe guaranteed limits are vulnerable, never since WWII have those deposits been seized to provide funds for government bailouts, even if the banks themselves are not bankrupt. Cypris was a dangerous road to take, not only for depositors but also for the future economic health of the EU, which depends on large depositors to help fund growth and cash flow in the EU. The new EU bank safety regulation should make clear that what happened in Cyprus will never again happen.