Lighthouse Investment Management
Euro-Zone Monitor - April 2013 Page 2
European Equity Markets Diverge as Crisis Resumes
As I was recently dining at a restaurant, the couple at the neighboring table kept complaining abouttheir food. The server tried to make things right, but eventually the manager had to intervene. Later, Ioverheard the manager lecturing the server, explaining that "perception is reality".And it's true. What does it matter if your bank deposits are safe as long as most customers
theyare safe? The worst thing that can happen to a bank is pictures of long lines of customers trying towithdraw money. Or, as in Cyprus, banks being closed, limited account access and "haircuts" to thosewho believed their money to be safe.Only then reality pierces perception, and depositors are suddenly reminded they are merely creditors.From the bank's perspective, deposits are a liability, a source of funding for their assets. The bankcustomer, of course, has no idea what kind of assets the bank acquires, and the risks taken. And heshouldn't have to.However, after the Troika (EU, ECB and IMF) seemingly didn't mind haircutting small depositors inCyprus, every depositor should be aware that the EU-wide deposit guarantee does not exist.By confiscating deposits of those depositors, who had little to do with the demise of their bank, a newfrontier in the Euro-zone crisis has been reached. EuroGroup president Dijsselbloem made it clear theCypriot bail-in was a template for future bank rescues. Depositors in the Euro-zone periphery are onhigh alert, and will likely not think twice before starting a bank run. Just as the Euro-zone crisis subsided,politicians have succeeded in setting it on fire once more. A strong divergence of returns in Europeanequity markets since February (see chart) is a sign of increased trouble ahead.