Lessons Learned

Cyprus will stand as an object lesson in a number of respects. Banks by definition are leveraged, and allowing the financial sector to reach such a size that bailouts would dwarf the size of the national economy is problematic, as Iceland, Ireland, and even the UK demonstrated in 2008.

05.04.2013 | 09:00 Uhr

However, doing so when you do not have control over the currency is doubly problematic, and suggests that as a model for economic growth, it may leave something to be desired.

Second, the necessity to guarantee deposits has been something understood by financiers for centuries, and this was formalized in the United States with the creation of the FDIC in 1933. Weaknesses in this guarantee were recognized in the UK in 2007 when it experienced its first modern bank run. There is a role for moral hazard, but historic experience tells us that the cancer of lack of confidence in a deposittaking institution can spread very quickly and out of all proportion to any instructive benefits to allow the institution to fail. Nonetheless, the Cypriot government decided initially on confiscatory bail-ins. It has, of course, retreated from this position and after a bank holiday of almost two weeks, deposits below €100,000 will be protected, but with haircuts applying to larger balances, up to 60%. The problem, unfortunately, is that the proverbial genie is out of the bottle: depositors in Cypriot banks know full well now that the principle that their deposits are safe has been violated. While the government has rowed back, the perception exists that those deposits now exist at the sufferance of a pen stroke, and it follows that severe capital controls have had to be put in place. It is a myth that capital controls were prohibited under the European Union’s (EU’s) Maastricht Treaty: they are permitted for six months in appropriate circumstances, and Reuters ran stories in July 2012 stating that capital controls across the Eurozone had been discussed in the event of a disorderly Greek exit. Nonetheless, with limits including the taking of more than €1,000 in cash from the country, it is true to observe that in a real sense a euro in Cyprus is not worth the same as euro elsewhere. A precedent has been set, and it should be a least somewhat unnerving to depositors to know that the rules are flexible, and may not apply to them at precisely the moment at which they would be expected.

The third thing we learned was that telling the truth can be unwise, even if the person doing the telling is surprising no one. Dutch Finance Minister Jeroen Dijsselbloem in his role as Head of the Eurogroup of European Finance Ministers spooked markets last week by stating that the Cyprus bail-in would serve as a model for future crises. We can guess what he meant to imply perhaps: the time for unconditional bailouts was over. In its own way this would be good news, because it must also imply a probably correct view that systemic risk was much less significant than it has been, and would no longer outweigh moral hazard concerns as if by right. One can see from where Mr. Dijsselbloem was coming. Indeed, many now believe that unconditional guarantee of Ireland’s banks, and in particular senior bondholders with no cap, was a significant policy error. However, to suggest that a confiscatory tax triggering a nationwide bank run in order to protect other deposits that many believe to have benefitted from a light-touch regulatory regime, only then for a complete political volte-face and a finance minister’s resignation was the model for the future handling of crises, was perhaps asking too much.

Yet, European citizens are perhaps oddly unmoved. There is little evidence of systematic deposit flight from European banks. Indeed, the Bank of Spain released data showing that for the 12 months ending in February 2013, while deposits shrank by slightly less than 6%, household deposits—that is, the deposits by exactly the people who would line up at ATMs—grew by 2.5%; the net was a non-resident deposit flight, which was much more significant. That is highly relevant for banks’ capitalization, but much less so for systemic risk. Indeed, with this, and Italy’s continuing efforts to gain a government, the S&P 500 has made new highs. Bond markets are back to their highs too, however. Something will have to give.

Der vollständige Kommentar im pdf-Dokument

Diesen Beitrag teilen: