2013 March 17 Sunday
Will Cyprus Bank Deposit Haircut Cause Bank Runs?
Cyprus' two biggest banks were on the verge of failing. So Cyprus made a deal with the EU for a bank bailout in exchange for a 6.75% to 9.9% tax (or partial government seizure) on bank deposits. Bailing out the Cypriots was going to cost too many billions of Euros. So Berlin insisted on the haircut. That is understandable. Why should the Germans bail out Cyprus?
The problem: This tax/haircut increases the risks that Greek, Italian, Spanish, and Portuguese citizens will decide it makes sense to move their money elsewhere. I would love to see what happens to deposits in Greece, Italy, Spain, and Portugal in the coming weeks and months. If I lived in one of those countries I'd get most of my money into northern European and American banks.
By Randall Parker at 2013 March 17 11:15 PM
As I understand the parlance, a 'haircut' is something that happens to bondholders when they don't get paid in full. So I think it's a bit misleading to say that Berlin is insisting on a haircut; they're insisting that if payments are to be made, they won't be made by Germany. Which is fair enough. I find it weird that the conversation in the media perpetually seems based on the idea that it's entirely normal for governments to run annual 3%-of-GDP deficits, and the only question is who gets left holding the bag. Given what we know about the size of the debt service some of these countries have, it would obviously make perfect sense for them to walk away from all their debts and then balance the budget with the savings. Sure, it would be a catastrophe for the world banking system - but for the country itself, the pain would probably pass quickly, so long as they didn't derive too much income of their own from banking. While I don't like people who welsh on their debts, it's worth remembering that we're looking at situations where the people who borrowed the money, the people who got the money, and the people who are being asked to repay it, are all quite different. The system of ethics I would apply to an individual or even a fixed set of individuals in such a case simply doesn't apply here. Let the bondholders beware.