Is Divorcing An Abusive Spouse Ever Too Expensive?

The EU may soon face a Pyrrhic choice....

By John Mauldin

An old joke asks "why does a divorce cost you half your money?" with the answer being "because it’s worth it". After all, there is little worse than being stuck in a loveless, tense, or even downright hostile relationship. Which, of course, is what the eurozone has become, without even the excuse of keeping the show on the road for the kids’ benefit. In the eurozone’s loveless marriage, no-one dares to move out because the potential costs of that action are so unclear. However, with the news that French unemployment continues to scale record heights, that the Bank of Spain has just downgraded Spain’s growth forecasts from -0.5% to -1.5% and that Spanish unemployment will consequently rise for a sixth year in a row to a likely record high of 27%, that European car sales continue to plummet, etc... the question remains open as to how much abuse the various spouses are willing to take?

For now Cyprus clearly wins in the battered wife stakes: daily cash withdrawals from banks are limited to €300, time-deposits (even those below €100,000) are frozen until further notice, etc. And needless to say, like every abusive husband, the Troika offered up the usual contradictory messages of "Cyprus was looking for its beating" and "it will never happen again". And so the question now faced by Europe’s other, battered wives (i.e., investors in "fiscally-challenged" countries and other European Monetary Union bank depositors) is whether this abusive husband has seen the light? Or whether the next time the pressure boils, the Troika’s punches will again fly, thereby extinguishing any notion of European solidarity, any dream of banking union, and any hopes that eurozone nations will stop sleeping in separate rooms and instead jump in the same bed of a common fiscal union needed to live harmoniously under a common monetary roof?

The "good news" is that Europe’s battered wives may not have to wait that long to find out whether the Troika has turned a new leaf.

Indeed, recent declarations by the International Monetary Fund (IMF) that Slovenian banks have some €7bn of bad assets to write off, along with the news two days ago that NOVA KBM, Slovenia’s second largest bank, was downgraded by Moody’s from B3 to Caa2, should, against the backdrop of Cyprus’ large bank deposit losses, make it challenging for Slovenian banks to keep deposits. Now, we fully understand that Slovenia is not Cyprus, and that Malta is not Slovenia (just like Portugal was not Greece, and Italy was not Spain, and Spain was not Uganda...). But having said that, Europeans are not that different from one another (after all, wasn’t this the premise on which the European Union was built!) and bank depositors in Slovenia or Malta must now be confronting a simple question: believe the Dutch finance minister that the treatment of bank depositors in Cyprus is a new template to deal with bust banks? Or trust the European Central Bank’s (ECB) recent declarations that Cyprus was a "one-time deal"? Needless to say, the risk is that Slovenian, Maltese and others around Europe conclude that, like most abusive husbands caught in the act, the Troika is probably speaking from both sides of its mouth and can no longer be trusted.

If so, a possible jog on the banks in Slovenia (the most likely next victim) will place the Troika in an odd predicament. For if Slovenia turns for help to deal with its challenged banks so soon after Cypriot depositors were left reeling, surely the Troika must apply the same tough love. Yet if Slovenia ends up getting softer treatment than Cyprus, can Nicosia really stick with a marriage where it is so obviously despised and mistreated? And how could Russia not take its dress-down as an extremely hostile act? On the other hand, if Slovenia also gets the full Diesel-bum treatment, the markets’ faith in the ECB’s ability to keep the show on the road will be properly shattered and a pan-European bank run might ensue. Hence, in Slovenia, the EU may soon face a Pyrrhic choice....