Cyprus: Lehman in the Med? (3)

by Andrew Stuttaford

This FT report should not come as any surprise:

The harsh terms of the Cyprus bailout package, including haircuts for bank depositors, won praise in Berlin from both left and right, but leading parliamentarians insisted that they must study the details before giving it their approval.

Norbert Barthle, the budget spokesman for Angela Merkel’s Christian Democratic Union, the largest party in the ruling coalition, said the deal was a success for Wolfgang Schäuble, the German finance minister.

“Germany has managed to have its concerns met, both in the interests of Europe and the German taxpayer,” he told the DPA news agency. He also paid tribute to the Cyprus government for having accepted painful conditions….

There’s been a lot of talk in the last two days about how the treatment of bank depositors in Cyprus has been a ‘heist’. Not really. Losing what they will do is very tough, but the alternative—had there been no bailout—would have meant losing a great deal more.

If there has been any “heist,” it is of taxpayers in the euro zone’s north, dragooned yet again into another “unique” bailout. Symbolizing this best, perhaps, is the fact that Estonian taxpayers will be contributing to the bailout of offshore Russian depositors in Cypriot banks. Now there’s irony. 

That said, as I mentioned yesterday, if a bank panic (arguably a perfectly prudent response) spreads beyond Cyprus to, say, Italy, the hit taken by Cypriot depositors — and particularly small depositors — may prove to have been a very expensive way of making a point. Writing in Breaking Views, Hugo Dixon (whose whole summary of the issues involved is very well worth reading) argues that a better approach would have been to impose a much heavier ‘tax’ on uninsured depositors (currently due to pay 9.9 percent), rather than penalize the smaller savers (due to pay 6.75 percent), who, as he puts it, are the “quiet heroes of the financial system” – even if the high rates they have recently being receiving on their accounts (as much as 7 percent on euro deposits, according to Dixon) was clear warning of trouble ahead.

In Dixon’s view, the reason that the Cypriot authorities did not concentrate the tax on uninsured deposits alone (15 percent would have done the trick, and the euro zone’s north would have been unlikely to object) was that they did not want to jeopardize Cyprus’s role as an offshore center for money (much of which comes from from Russia). But “even if there is a domestic political logic in cushioning Russian mafia at the expense of Cypriot widows, such a policy is bad for the rest of the euro zone.” That’s because it runs the risk of scaring small depositors in other vulnerable markets. If it does, that (I reckon) could lead to a cascade of bank runs across the continent with consequences made all the worse by the inherently unstable structure of the currency union.

Dixon argues (with some force) that the immediate risk of that remains low for now, and he may well be right (although it is simply impossible to know: what would you do if you were a depositor in an Italian bank?) but the sting comes in the last line of his piece:

Citizens in the rest of the euro zone now know that, if push comes to shove, their insured deposits could be grabbed too.

Tick tock. 

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