World View: Cyprus Bailout Threatens International Bank Runs
Cyprus bailout threatens international bank runs
Bank of Cyprus
Shocked and angry residents of Cyprus on Saturday morning rushed to
their banks and ATMs to withdraw their savings, but it was too late.
The ones who had been lucky enough or smart enough or frightened
enough to have withdrawn their money earlier in the week lost nothing,
but the ones who believed the Cypriot and European politicians who
said that all bank deposits are safe were screwed.
In the wee hours of the night, the Eurogroup of eurozone finance
ministers agreed to bail out Cyprus, after a year of negotiations.
Cyprus needed a 17 billion euro bailout loan for its banking system,
but the Eurogroup was only willing to come up with about 10 billion
euros, so the difference had to be made up by penalizing depositors:
9.9% on deposits above 100,000 euros, and 6.75% on smaller deposits.
There were harsh disagreements in the euro zone whether Cyprus should
be bailed out at all. The problem is that Cyprus's banks have been
used as vehicles for laundering billions of dollars by Russian
oligarchs who don't want to pay Russia's taxes. Thus, bailing out
Cyprus's banks would be bailing out Russia's oligarchs. Many MPs in
Germany's Bundestag refused to consider a bailout. The final
settlement punishes ordinary Cyprus citizens as well as the Russian
The fear is that now that a precedent has been set, the same method
will be used with other countries, including Spain, Portugal and
Greece. It might be used again in Cyprus, if another bailout is
needed. Politicians are insisting that this was a one-time situation
that will never happen again, but those are the same politicians that
promised that depositors' life savings would be protected. They're
also the same politicians that said that each bailout of Greece and
each new austerity plan in the last three years would be the last.
Could the same thing happen in the United States? Think back over the
last six years, and think about all the "things that could never
happen here" that now have happened. And we have a President whose
announced intention last week is to spend as many trillions of dollars
as he can.
There actually have been bank panics in recent times. In 2007, there
was a bank run in California, and another bank run in Britain. (See
"Anxious investors mob Countrywide Bank to withdraw their deposits." and "Panic appears to be spreading in Britain, as depositors mob Northern Rock" from 2007.)
In those cases, politicians quelled the growing panic by announcing
that all bank deposits would be safe, and then by following up with
policies. Since then, North Americans and Europeans have felt
confident that their life savings were safe, and there haven't
been any major bank runs since 2007.
Politicians here and in Europe are now going to be scrambling to make
new promises and pronouncements that everyone's bank deposits are
safe. It remains to be seen whether those promises will be believed.
Guardian (London) and Kathimerini
Permanent web link to this article
Receive daily World View columns by e-mail