18 March 2013

Cyprus bailout: The wrong signal

Cyprus, the eastern Mediterranean island, becomes the fifth country to be rescued: euro zone Finance Ministers agreed on a EUR 10 bn loan; the novelty of the rescue is a tax on deposits with banks in Cyprus to amount to EUR5.8 billions. Mrs Merkel (and nobody contradicted her) found that Cyprus is a centre for money laundering (from Russia and the Middle East) and therefore depositors should be taxed to participate in the bailout; well, if it is the case (and probably it is), the country should not have been admitted within the euro zone in the first place and probably the EU, since these accusations have been running for so many years; by the way, France, the UK, Luxembourg, The Netherlands, Italy, Spain should also be concerned (money laundered via banks and/or real estate). Others explained that a EUR 17 billion loan would overburden the debt/GDP ratio in a way where Cyprus would not be able to repay which is right at 200%. Frankly, EUR 10 billion lending does not change the conclusion anyway, at +/- 150% ratio.
Bank accounts were frozen and the tax will be immediately levied on Tuesday when banks reopen (subject to a positive vote at the Parliament of Cyprus).
The levy is:

6.75% tax on deposits below EUR 100,000

9.9% tax on deposits above EUR 100,000

I would remind the reader that Cyprus banks were meant to go under immediately after the haircut was decided on Greek debt (EUR 4.5 billion loss) and nobody foresaw the problem coming? I do not believe it but since the fiscal situation of Cyprus has deteriorated markedly (oh! Yes, I had forgotten that Presidential elections in Cyprus were held late February 2013…).

Besides the morally disputable action –why punishing the honest citizen who has saved all his life and in addition may have loans on the other side? – It is a very dangerous action sending a clear signal to all European citizens and the rest of the world: Europe is no longer a safe place for depositors; we knew that artificially low rates and rising inflation were in motion to deprive savers, but Saturday’s decision is a leapfrog in the wrong direction. I understand Mrs Merkel who wants to send a tough signal to her public opinion and Parliament. I am not either convinced by the reason given by the Dutch Finance Minister Jeroen Dijsselbloem: “As it is a contribution to the financial stability of Cyprus, it seems just to ask a contribution of all deposit holders”, so what about the Greeks, Portuguese, Irish and Spanish? And what about senior and junior lenders: I would be most interested to see whether they will be hit and if yes, in which magnitude (no details on this-probably banks mainly financed themselves via deposits; I did not look at aggregated Cypriot bank’s balance sheets)?

This is creating a precedent which will hit the confidence in the euro zone institutional environment and safety for depositors. Despites all assurances yesterday and today, particularly in Spain, that Cypus is a special case (it is ALWAYS a special case), residing in a trouble euro zone country, I would be very very worried and would not wait to get most of my saving in a safe place (i.e. outside the euro zone -the nearest is London). No depositor in the euro zone is safe any longer with his savings: each country could impose such a tax for whatever reason, good or bad (remember Roosevelt stealing gold from Americans in April 1933). This would be politically correct: tax all deposits above EUR100.000 in countries receiving EU money, and why not in countries with disastrous public account (France and Italy). Not the way forward for a sustainable fiscal consolidation to create the bedrock of future prosperity.

In the meantime France will not abide by the Maastricht criteria in 2013 (and 2014, I bet), or 8 years over the past 11, without any sanction, despite repeated assurances. Another wrong signal: the rules do not apply the same way to every euro zone country.


Bloomberg: Europe Braces for Fresh Turmoil With Cyprus Deposit Levy


Financial Times: Cypriot bank deposits tapped as part of €10bn eurozone bailout