'This sucker could go down." So said George W Bush back in 2008, at the
height of the global financial storm. The then US president was
referring to the massive risks facing the world's largest economy
following the Lehman collapse. Could Dubya's prosaic words now be
applied to the euro? Will Cyprus quit the single currency?
The 'bail-in' deal imposed on this tiny Mediterranean nation last
week is better than the one mooted less than a fortnight ago. The lunacy
of penalising insured deposits, those under €100,000, has been avoided.
While the atmosphere in Cyprus is tense, it is also obviously a relief
that, since the banks reopened their doors last Thursday, after almost a
fortnight shut, there's been no serious civil unrest.
At Laiki
Bank, the island's second-largest, deposits above €100,000 are being
slashed by up to 80pc. Similarly, uninsured deposits at Bank of Cyprus,
the biggest bank in the country, will suffer 40pc losses. All savers,
meanwhile, are subject to stringent controls on withdrawals, including a
€5,000 monthly limit. Cypriots travelling abroad can take just €1,000
with them and import payments must be approved by the central bank.
Cyprus
marks the first eurozone banking crisis that is being "resolved"
without a seemingly limitless reliance on taxpayers' money from other
member states. A distinction is being made between solvent and insolvent
banks, with bondholders at the latter taking a very big hit. That is
how it should be.
Had insured savers also been stung, those with
deposits below €100,000, that would have breached a eurozone guarantee
extended just a few years ago. It would also have spread panic and even
political extremism across Europe, as tens of millions of households
took fright at the security of their savings.
Having said that, I
still have a very big problem with the large depositor write-downs.
Depositors are not bondholders – who knew their money was at risk and
reaped a commercial yield on their investment. On the contrary,
depositors put their money in a bank, at a lower rate of return,
precisely to keep it safe.
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