The Cyprus bailout fiasco

Get ready for a week (if we're lucky) of euro crisis news

The major news over the weekend was the continuing incompetence of Europe’s policymakers, who seem determined to make the euro crisis look as much like Great Depression II as possible.

There’s already 27 percent unemployment in Greece and Spain. Ireland and Portugal are at 15 percent and 16 percent, respectively. Fascism is making unsettling inroads, and Germany is ascendant. The eurocrats have apparently decided that what the continent needs now are some good old-fashioned bank runs.

Deposit insurance helps prevent the kind of crippling mass withdrawals we saw in the Great Depression. If you know the government has insured your money, you’re much less likely to withdraw your money in a panic on rumors of your bank’s impending demise.

But in the bailout of Cyprus’s banks, depositors who have less than €100,000 in the bank—and thus are supposed to be fully insured—will lose nearly 7 percent of their money. Meantime, the banks’ bondholders won’t take any haircuts and their rich (disproportionately Russian) depositors—will have their haircut subsidized by small-time Cyprus savers. The Financial Times, in a standout editorial, calls the move “morally unconscionable” and “a conscious choice to make poorer people pay to help richer ones.”

Now the European authorities (and that effectively means the Germans), have potentially undermined their entire system of deposit insurance, for a measly $6 billion. If insured deposits aren’t safe, what is?

And this has bigger implications, even, as Audit contributor Felix Salmon writes:

The big loser are working-class Cypriots, whose elected government has proved powerless in the face of decisions driven by Germany, and who are now edging towards fury. The Eurozone has always had a democratic deficit: monetary union was imposed by the elite on unthankful and unwilling citizens. Now the citizens are revolting: just look at Beppe Grillo. Across the continent, they’ve lost their democratic right to determine their own fate at the ballot box, and instead they’re being instructed what to do by Germans. Now, in Cyprus, they’re simply and directly losing their money.

That FT editorial is on the same page:

“The prescription of universal austerity combined with kid-gloves treatment of big investors in banks is increasingly toxic to European voters. Leaders have just added fuel to the fire.”

Even bankers are making a run on the banks, according to The New York Times:

“Why should I leave my money in Cyprus?” said an investment banker who for the past two days had been withdrawing the maximum 2,000 euros he was allowed from his foreign bank account in Nicosia. “I have already instructed my bank to send my entire savings to London when the banks open on Tuesday. A precedent has been set — what is to stop them from doing this again?”

The Financial Times reports that Germany demanded €7 billion of the bailout come from depositors and that Cyprus’s president, who initially stormed out of the meetings, couldn’t bear to let rich depositors take more than a 10 percent hit, so he applied the haircut to the country’s insured depositors too:

“The Cypriot president did not want to agree to a levy higher than 10 per cent,” said one top negotiator. “People were joking that he has only rich friends.”

The Journal has a good rundown of how the deal went down, and reports Cyprus’s reaction to the terms dictated by Berlin and allies:

“It was the worst time in my life. It reminds me of the invasion of the Turks in 1974,” said a Cypriot official involved in the negotiations.

And Yves Smith on the Germans:

Germany is trying to maintain policies that are contradictory: it wants to continue to have large trade surpluses, yet not fund its trade partners; its wants debtors to meet their obligations, yet refuses to allow either enough in the way of fiscal deficits or monetary easing to keep debtor countries from falling into deflationary spirals, which assure default. Germany’s failure to relent on any of these conditions means that what breaks will be the financial system.

Hang on tight (again).

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,