It would serve Germany and the EU right if Cyprus got its rescue money from Russia in exchange for a naval base or two
Now and then we think the euro crisis is behind us. Then it suddenly recurs like a bad dream. The only difference between a bad dream and the euro crisis is that the latter is devised by people who think they have found a solution to the latest problem. These are clever, highly placed, even highly paid people who just don?t seem to be able to see beyond their noses.
It is too early to say how the Cyprus problem will be resolved. It is unlikely to have been settled by the time this column appears. But no doubt we will have more indications of which way the developments are headed.
The idea of a ?bail in? is not new but the entities being bailed in were supposed to be the bond holders and equity owners of the banks which needed rescuing. That is what capital cushion is for after all and that is what Basel conditions have been about. No one had thought that the depositors would be bailed in as the largest single entity. The cut from the deposits was ?progressive? since more was being taken out of deposits above euro 100,000 than below. But even so the tax take is hefty.
The idea must have been that since Cyprus had been receiving Russian deposits which may have been a case of money laundering the tax would not be objected to. The guilty would know they deserved the punishment. But, alas, not all depositors are German Protestants with a strong sense of guilt. It should be of no concern to the bank to discriminate between local and foreign depositors; it cannot be legal in any case. Even if the money had been of doubtful legality, it is a bank?s duty to protect its depositors? interests. Here there was a raid approved by ECB itself! A government which has concerns about criminality of some of these deposits (as in the case of black money deposits in Swiss banks), it can seek information from the bank. But it remains a bank?s duty and privilege to protect the identity of its depositors. Here the central bank itself was asking for banks to violate their ethical charter.
Even so, the Cyprus Parliament rejected the proposal. As of the time of writing, Michael Sarris, the Cyprus finance minister, is in Moscow trying to put together a rescue package. It would serve Germany and the EU right if Cyprus got its rescue money from Russia in exchange for a naval base or two. That would change the geopolitics of the Mediterranean. After all, Syria is being lost to Russia as an ally. Cyprus would be even more convenient. At euro 20 billion, it would be a cheap way of getting naval bases.
Whatever the geopolitics, there will be repercussions on banking throughout the eurozone. At the very least, punters would avoid having large single accounts and go for multiple accounts with smaller amounts which may escape the scrutiny of ?bail in? agents. Or it may trigger an exit from eurozone banks into sterling and dollar banks overseas. There are enough fragile banking systems in the eurozone to start a panic. If that does happen, there would have to be many more ?bail ins? and the eurozone crisis could get worse.
Of course, the correct long-run solution was to have a banking union. One is on the cards but has not got far off that state. But then until the individual national banks are cleaned up, there can be no question of setting up a banking union. So, it is a chicken-and-egg situation. Germany suspects that even after much stress testing etc, individual banking systems will remain fragile and the bill for their rescue will fall on Germany. To avoid that, we delay the banking union and here is where we end up.
Iceland, which had a similar case of its private banks misbehaving, came to a much better solution. It conducted a referendum and then refused to pay the debts incurred by the banks. It suffered a severe output shock for two years but is now back in the international markets borrowing at a better rate than Portugal, let alone Greece. Bankruptcy is thus a perfectly feasible outcome for a nation or bank unable to cope with the debt mountain. Eventually, the lenders will come back as they have always rosier dispositions than borrowers.
Yet worse could happen and Cyprus may quit the eurozone. This would be the healthiest outcome. Cyprus is small enough not to start an exodus and yet provide a helpful precedent. If the eurozone agony is to end any time soon, it has to be that the northern stronger euro members would come together in a tighter union and the weaker southern members will associate themselves with the eurozone in an ERM-type system which affords a small amount of leeway for the exchange rate to move.
If that happens, Cyprus would have contributed to the greater good of the eurozone by its harakiri.
The author is a prominent economist and Labour peer