Cyprus bailout threatens international bank runs
Bank of Cyprus
Shocked and angry residents of Cyprus on Saturday morning rushed totheir banks and ATMs to withdraw their savings, but it was too late.The ones who had been lucky enough or smart enough or frightenedenough to have withdrawn their money earlier in the week lost nothing,but the ones who believed the Cypriot and European politicians whosaid that all bank deposits are safe were screwed.
In the wee hours of the night, the Eurogroup of eurozone financeministers 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 billioneuros, 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 shouldbe bailed out at all. The problem is that Cyprus’s banks have beenused as vehicles for laundering billions of dollars by Russianoligarchs who don’t want to pay Russia’s taxes. Thus, bailing outCyprus’s banks would be bailing out Russia’s oligarchs. Many MPs inGermany’s Bundestag refused to consider a bailout. The finalsettlement punishes ordinary Cyprus citizens as well as the Russianoligarchs.
The fear is that now that a precedent has been set, the same methodwill be used with other countries, including Spain, Portugal andGreece. It might be used again in Cyprus, if another bailout isneeded. Politicians are insisting that this was a one-time situationthat will never happen again, but those are the same politicians thatpromised that depositors’ life savings would be protected. They’realso the same politicians that said that each bailout of Greece andeach new austerity plan in the last three years would be the last.
Could the same thing happen in the United States? Think back over thelast six years, and think about all the “things that could neverhappen here” that now have happened. And we have a President whoseannounced intention last week is to spend as many trillions of dollarsas he can.
There actually have been bank panics in recent times. In 2007, therewas 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 announcingthat all bank deposits would be safe, and then by following up withpolicies. Since then, North Americans and Europeans have feltconfident that their life savings were safe, and there haven’tbeen any major bank runs since 2007.
Politicians here and in Europe are now going to be scrambling to makenew promises and pronouncements that everyone’s bank deposits aresafe. It remains to be seen whether those promises will be believed.Guardian (London) and Kathimerini