This writers of this article rely on anecdotal evidence from man-on-the-street interviews in an attempt to explain why there was not bank run in Cyprus last week. The article is long on bromides extolling the nature of Cypriots but short on facts. Apparently, Cypriots are more civilized and peaceful than other protesting Europeans and inured to this crisis because of a civil war fought a generation ago.
Those are nice stories, but there are four reasons why there was not a run on Cypriot banks when they reopened on Thursday. The most important reason is that the €100k deposit insurance remained in place after the bailout. As long as the perception exists that small accounts are safe, there will not be a bank run among the people.
Additionally, a limit on withdrawal amounts has reduced the exigency of obtaining one’s money. The withdrawal limit has created a perception that the banks are not in danger of failing, because people may only take out a limited amount of money. These reasons are covered in the article but given short shrift over the stories from regular Cypriots.
These two reasons are not. First, the bank run already happened. Since Cyprus first began making noise about a bailout in June of 2011, there were decreases in deposits in 14 of 20 reported months, and the run picked up speed in January and February. Once the banks closed, connected customers were still able to withdraw funds and remove them from the country. No one knows how much money fled Cyprus in March, but it was a lot, enough to affect the proposed bailout. More money or another complete bailout for Cyprus will be necessary within a few months.
The second reason is that people are stupid. A bank deposit in Cyprus is now a loan to a very risky institution without the high interest rates necessary to pay for this risk. Under these terms, no one should keep money in a Cypriot institution. Cypriot mattresses do not pay interest either, but at least the government will not confiscate them.
The reason why a bank run did not occur Thursday is because it had already taken place, but a bank run is not even Cyprus’ biggest problem right now. It’s bank avoidance. Foreigners will no longer utilize Cypriot banks meaning that the island must quickly find a new industry that will replace 18% of its GDP if it is to avoid a depression and pay back the troika.
A lot of connected people seemed to have inside information about the bailout. Prior to the banks closing, the pace of withdrawals picked up. The President of Cyprus is said to have moved €21mm out of the country before agreeing to the deal.