The Cyprus bail-out
Unfair, short-sighted and self-defeating
Mar 16th 2013, 14:54 by
A.P.
ECONOMIST
IT
IS not a fudge, but it is still a failure. The euro zone’s bail-out
of Cyprus, which was sealed in the early hours of Saturday, did get
the bill for creditor countries down from €17 billion to €10
billion, as had been rumoured. But the way it did so was somewhat
unexpected.
Almost
€6 billion of the savings for taxpayers in euro-zone countries came
from losses imposed on depositors in Cyprus’s outsize banks. A
one-off 9.9% levy will be imposed on all deposits over the insurance
threshold of €100,000 before banks reopen after a bank holiday
on Monday. That idea had been in the air for a while, not least
because a lot of those uninsured deposits came from outside Cyprus,
and from Russia in particular. The politics of saving wealthy
Russians with money loaned by thrifty Germans were always going to be
tricky.
What
had not been anticipated was a 6.75% loss for savers with deposits in
Cypriot banks below the insurance ceiling. Cypriots woke up this
morning to find bank branches closed to them. By the time they will
be able to get at their money, it will be too late. The offer of
equity in banks to replace the value of their savings is meant to be
a balm but it’s not a choice they would have made. Why this
decision was taken is not yet clear. The most plausible explanation
is that the Cypriot government itself preferred to spread the pain
rather than wipe out non-resident depositors and jeopardise its
long-term prospects as an offshore financial centre for Russian and
other money.
Whatever
the rationale, it is a mistake for three reasons. The first error is
to reawaken contagion risk elsewhere in the euro zone. Depositors
have come through the financial crisis largely unscathed. Now they
have been bailed in, some of them in breach of an explicit promise
that they can be sure of getting their money back even if a bank goes
belly-up.
Euro-zone
leaders will spin the deal as reflecting the unique circumstances
surrounding Cyprus, just as they did the Greek debt restructuring
last year. But if you were a depositor in a peripheral country that
looked like it needed more money from the euro zone, what would your
calculation be? That you would never be treated like the people in
Cyprus, or that a precedent had been set which reflected the
consistent demands of creditor countries for burden-sharing? The
chances of big, destabilising movements of money (into cash, if not
into other banks) have just shot up.
The
second error is one of equity. There is an argument to be made over
the principles of bailing in uninsured depositors. And there is a
case for hitting everyone in Cypriot banks before any taxpayer in
another country. But there is no moral imperative for whacking
Cypriot widows and leaving senior bank bondholders untouched, as
appears to be the case here; or not imposing any losses on
sovereign-debt investors in Cyprus; or protecting depositors in the
Greek operations of Cypriot banks, as has also happened. The euro
zone may cloak this bail-out in the language of fairness but it is a
highly selective treatment. Indeed, the euro zone’s insistence that
this is a one-off makes that perfectly plain: with enough foreigners
at risk and a small enough country to push around, you get an outcome
like Cyprus. (That is one reason why people are now wondering about
the implications of this deal for little Latvia, also home to lots of
Russian money and itself due to join the euro zone in 2014.)
The
final error is strategic. The Cypriot deal has no coherence in the
larger context. The euro crisis has been in abeyance for a few
months, thanks largely to the readiness of the European Central Bank
to intervene to help struggling countries. The ECB’s price for
helping countries is to insist they go into a bail-out programme. The
political price of going into a programme has just gone up, so the
ECB’s safety net looks a little thinner.
The
bail-out appears to move Europe further away from the institutional
reforms that are needed to resolve the crisis once and for all.
Rather than using the European Stability Mechanism to recapitalise
banks, and thereby weaken the link between banks and their
governments, the euro zone continues to equate bank bail-outs with
sovereign bail-outs. As for debt mutualisation, after imposing losses
on local depositors, the price of support from the rest of Europe is
arguably costlier now than it ever has been.
It
is also hard to square this outcome with the ongoing overhaul of
finance. The direction of efforts to improve banks’ liquidity
position is to encourage them to hold more deposits; the aim of
bail-in legislation planned to come into force by 2018 is to make
senior debt absorb losses in the event of a bank failure. The logic
behind both of these reform initiatives is that bank deposits have
two, contradictory properties. They are both sticky, because they are
insured; and they are flighty, because they can be pulled instantly.
So deposits are a good source of funding provided they never run. The
Cyprus bail-out makes this confidence trick harder to pull off.
Other
than that, it is a really good deal.
