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| Cyprus bailout shows European policy elite has learned nothing from crisis | Cyprus bailout shows European policy elite has learned nothing from crisis |
| (17 days later) | |
| The thumbs down given by the financial markets to the bailout plan for Cyprus was swift, decisive and predictable. It was hard to find anyone with a good word to say for those at the European Union, the European Central Bank and the International Monetary Fund who decided it would be a good idea to levy a tax of at least 6.75% on all Cypriot bank depositors. Shares and the euro fell, money flooded into the safe havens of gold and the US dollar, and interest rates in Spain and Italy rose. | The thumbs down given by the financial markets to the bailout plan for Cyprus was swift, decisive and predictable. It was hard to find anyone with a good word to say for those at the European Union, the European Central Bank and the International Monetary Fund who decided it would be a good idea to levy a tax of at least 6.75% on all Cypriot bank depositors. Shares and the euro fell, money flooded into the safe havens of gold and the US dollar, and interest rates in Spain and Italy rose. |
| All this just when there was growing confidence that the eurozone was over the worst. | All this just when there was growing confidence that the eurozone was over the worst. |
| Most of the attention was on the contagion risk posed by the levy. The concern expressed by investors was simple: if the taxpayers of the rich northern members of the eurozone are going to force a country that represents only 0.2% of the club's GDP to part-finance their own bailout, will they be any more generous when it comes to some of the big-country members such as Italy and Spain that might be next in line? And in the event that the Italians and the Spanish get an inkling that a bailout is looming, won't they immediately withdraw all their euros immediately, triggering a bank run? | Most of the attention was on the contagion risk posed by the levy. The concern expressed by investors was simple: if the taxpayers of the rich northern members of the eurozone are going to force a country that represents only 0.2% of the club's GDP to part-finance their own bailout, will they be any more generous when it comes to some of the big-country members such as Italy and Spain that might be next in line? And in the event that the Italians and the Spanish get an inkling that a bailout is looming, won't they immediately withdraw all their euros immediately, triggering a bank run? |
| These were points the financial masterminds who pieced together the Cypriot deal appeared to have overlooked. Suggestions that Cyprus was a one-off, a special case that certainly did not set a precedent for future bailouts was laughed off by the markets. They have heard that refrain rather too often during a crisis now into its fourth year to take such attempts at reassurance seriously. | These were points the financial masterminds who pieced together the Cypriot deal appeared to have overlooked. Suggestions that Cyprus was a one-off, a special case that certainly did not set a precedent for future bailouts was laughed off by the markets. They have heard that refrain rather too often during a crisis now into its fourth year to take such attempts at reassurance seriously. |
| Three other points are worthy of mention. The first is the dubious morality of what some were calling "state-sponsored theft". Europe is supposed to guarantee all deposits up to €100,000 in the event of a bank collapse, and the tax announced at the weekend violates the spirit if not the letter of that commitment. | Three other points are worthy of mention. The first is the dubious morality of what some were calling "state-sponsored theft". Europe is supposed to guarantee all deposits up to €100,000 in the event of a bank collapse, and the tax announced at the weekend violates the spirit if not the letter of that commitment. |
| The argument from the ECB/EU/IMF troika is that the Cypriot banks have not actually collapsed (although they will do so without the bailout) so the guarantee does not apply. Tell that to the nervous depositor in Madrid or Milan. | The argument from the ECB/EU/IMF troika is that the Cypriot banks have not actually collapsed (although they will do so without the bailout) so the guarantee does not apply. Tell that to the nervous depositor in Madrid or Milan. |
| What's more, there is something morally offensive about a plan that makes ordinary Cypriots lose a chunk of what will in many cases be meagre savings while bond holders get away unscathed. As Marc Ostwald of Monument Securities noted, the deal "highlights how post 2007 efforts to resuscitate and rescue western economies have continued to favour the vested interests of the financial sector, while treating the "population at large" with disdain and contempt – this sort of attitude is still a seedbed for social revolution, as has been witnessed above all in the Arab Spring." | What's more, there is something morally offensive about a plan that makes ordinary Cypriots lose a chunk of what will in many cases be meagre savings while bond holders get away unscathed. As Marc Ostwald of Monument Securities noted, the deal "highlights how post 2007 efforts to resuscitate and rescue western economies have continued to favour the vested interests of the financial sector, while treating the "population at large" with disdain and contempt – this sort of attitude is still a seedbed for social revolution, as has been witnessed above all in the Arab Spring." |
| A second point, overlooked in the furore about the raid on depositors, is that Cyprus will be subjected to a brutal austerity programme in return for the financial help. The country is already in a double-dip recession and contracting by 3% a year. The proposal is that it should suck a further 4.5% out of the economy at a time when its key financial services sector is struggling and tourists – the other mainstay of the economy – are likely to stay away for (legitimate) fear of social unrest. Making every bank depositor at least 6.75% worse off at a stroke is the work of a European policy elite that has learned nothing whatsoever from the crisis. The suggestion that Cyprus will reduce its debt to GDP ratio from 145% as a result of the bailout is for the birds. | A second point, overlooked in the furore about the raid on depositors, is that Cyprus will be subjected to a brutal austerity programme in return for the financial help. The country is already in a double-dip recession and contracting by 3% a year. The proposal is that it should suck a further 4.5% out of the economy at a time when its key financial services sector is struggling and tourists – the other mainstay of the economy – are likely to stay away for (legitimate) fear of social unrest. Making every bank depositor at least 6.75% worse off at a stroke is the work of a European policy elite that has learned nothing whatsoever from the crisis. The suggestion that Cyprus will reduce its debt to GDP ratio from 145% as a result of the bailout is for the birds. |
| All of which leads on to the final point. Clearly Cyprus is in dire need of money and the assumption the weekend was that Cyprus had no choice but to sign on the dotted line, because the alternative would be the collapse of its banks by the weekend followed by the collapse of the real economy thereafter. | All of which leads on to the final point. Clearly Cyprus is in dire need of money and the assumption the weekend was that Cyprus had no choice but to sign on the dotted line, because the alternative would be the collapse of its banks by the weekend followed by the collapse of the real economy thereafter. |
| But who has more to lose here? Cyprus, for whom life is going to be grim whatever happens? Or the rest of the eurozone which would be quickly engulfed in the contagion from a Cypriot collapse? The Cypriot parliament is unlikely to accept the bailout in its present form and if it hangs tough may get the terms substantially softened. | But who has more to lose here? Cyprus, for whom life is going to be grim whatever happens? Or the rest of the eurozone which would be quickly engulfed in the contagion from a Cypriot collapse? The Cypriot parliament is unlikely to accept the bailout in its present form and if it hangs tough may get the terms substantially softened. |
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