ABOVE all, don’t lie, especially when it comes to people’s savings. That was a rule European politicians used to understand, especially in a continent where dispossessed middle classes have repeatedly turned to fascists when their savings were wiped out. Today, however, the political class and its corporatist allies have forgotten this golden rule – just as they no longer remember that democracy cannot be replaced by technocrats. Eventually, there will be consequences; they won’t be pretty.
That is why I am so worried about the horrifying news of a wealth tax being levied on all bank accounts in Cyprus. The EU, having promised that the first €100,000 of people’s deposits would be protected by government deposit insurance, and the Cypriot president, who insisted that savers would be safe, have gone back on their word. They have got away on a technicality: the banks are not actually bust (they are being bailed out) and this is a one-off wealth tax, not a loss caused by financial institutions failing to meet their obligations, so the insurance is not being activated. But given that depositors are being handed bank shares – just as if they had they been bailed-in following a bankruptcy – this is clearly a disguised bank failure and a case of the authorities reneging on their guarantee.
Now, such insurance policies (in their current form) are problematic – they fuel moral hazard and risk-taking by depositors, who no longer have an incentive to monitor bank behaviour – and they need to be reformed. They can also be unaffordable: if governments go bust, then state provided deposit insurance can become just another worthless promise. We need new ways to protect depositors and make sure their savings are safe, while eliminating distortions; but that is a debate for another day. In addition, the idea that a bust country can demand a bailout from its more prudent neighbours, without any onerous conditions attached, is another nonsense. I can understand why the Germans are sick of writing blank cheques – though they should have guessed this was how it would end when they joined the euro.
The problem is that much of this weekend’s nonsense was unnecessary. Depositors with under €100,000 could have been protected; those with more could have lost 15-20 per cent of their savings (in return for stakes in the banks), or however much was needed to reach the amount required under the bailout terms. It would have been horrible for them, but fair: they can’t have failed to notice that the country is in crisis and weren’t promised their money would be safe. All the bonds of Cypriot banks should also have been turned into bank equity; astonishingly, this doesn’t seem to be part of the current plans.
Talks were ongoing last night to try and reduce the burden on smaller deposits and increase it on larger ones; banks will remain shut for a while. Complete chaos remains possible: if no deal is reached, or if MPs vote it down, the bailout offer will be rescinded and Cyprus will collapse, and may have to quit the euro and readopt its own currency, which would be bound to plummet on the forex market. This would wipe out the value of deposits and destroy the entire banking system, and would therefore be an even worse outcome – in the short-run at least – for savers.
But even if a deal with a smaller tax on smaller insured deposits is agreed, it would still breach a key principle. Nobody in troubled economies such as Italy, Portugal, Spain and Greece will believe their money to be safe. This is bound to trigger a renewed slow-motion run on banks in these Southern European nations.
One explanation being given for why the tax is being levied on everybody, not just on uninsured deposits, is that Cyprus wants to protect its status as a financial centre – hitting large depositors and companies with a much bigger levy would have chased them away. Many of the larger depositors are Russian, and the Cypriot authorities didn’t want a row with Moscow. It seems too late to worry about this; Cyprus’ reputation is already toast. What is clear is that Germany would have never ratified the bailout in the absence of depositors being hammered in some way; and the European Central Bank threatened to pull the plug on Cypriot banks were the terms of the bailout not agreed.
So there are two more lessons to be learnt. If you are a big EU country, you will be protected; if you are small one, you will be bullied. And from now on, don’t expect bank deposits above the insured threshold to be protected in the event of a fresh crisis. Food for thought, certainly.
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