Statements made by the head of the Eurozone finance ministry about the Cyprus bailout deal sent a nervous twitch through European markets. As Breitbart News has reported, as part of a deal with the European Union and International Monetary Fund, Cyprus will seize up to 40% of assets from private bank accounts with over 100,000 euros in a retroactive “tax.”
The cash grab in Cyprus sent an immediate signal to anyone with large amounts of money in the bank that you are not safe as you think you are. Amplifying those fears, Jeroen Dijsselbloem, the chair of the Eurozone finance ministers, made statements that seemed to indicate the Cyprus deal will be the model for future bailouts. The result was “chaos“:
The comments were an open invitation to any investor with more than €100,000 in a eurozone bank to remove it without delay, which some then did.
By the end of the day shares in Europe were tumbling, the euro was dropping against the dollar and the cost of insuring European banks against default was rising, forcing Dijsselbloem to issue a clarification of his earlier remarks.
However, a look at the interview with Dijsselbloem and FT.com does put the comments in some context. The Dutch finance minister said:
If there is a risk in a bank, our first question should be: “Ok, what are you the bank going to do about that? What can you do to recapitalise yourself?” If the bank can’t do it, then we’ll talk to the shareholders and the bondholders. We’ll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: “What can you do in order to save your own banks?”
In other words, taking away the risk from the financial sector and taking it onto the public shoulders is not the right approach. If we want to have a healthy, sound financial sector, the only way is to say: “Look, there where you take on the risks, you must deal with them. And if you can’t deal with them, you shouldn’t have taken them on and the consequence may be that it’s end of story.” That is an approach that I think we should, now that we’re out of the heat of the crisis, consequently take..
The long-term effect on banking and investment remains to be seen. While the well-to-do are unlikely to start hiding excess cash under a mattress en masse, the ongoing international banking crisis and this approach to solving it may have a ripple effect on the worldwide economy if there’s a run on large accounts.