A choice between bad and worse

There were no good options for dealing with the problems in Cyprus.

Both Cyprus and the Euro zone negotiators trying to put a deal together were facing a choice between bad options and terrible ones.

The bailout deal which was rejected by the Cypriot parliament was a particularly bad one because it would have confiscated money from the bank deposits held by small savers, and I dread to think how much harm that would have done to public confidence in banks all around the world.

The need to avoid moral hazard means that you allow those who do stupid things to suffer consequences, but putting your money in a bank rather than hiding it in the mattress of your big should not be allowed to become a stupid thing to do.

For governments to ask taxpayers to pay to protecting the managers and shareholders of a badly run bank is a mistake. Protecting the depositors of the bank is not. Actually taxing bank deposits is a really, really bad idea.

The deal which was actualy approved protects small savers, but confiscated a sigifican chunk of the bank deposits of the customers of two big banks. That is going to send a signal which has serious and harmful consequences, and not just for Cyprus.

The Economist magazine called the bailout "a dangerous deal" in an article which you can read  here, and I agree with them. Letting Cyprus go down the plug-hole would have been even worse for Europe and yes, that would have been bad for us here in Britain. The original proposal would also have been worse than what has now been agreed.

But I am with "The Economist" that this was a bad deal, and one which will harm the Euro and european economies.

Jeroen Dijsselbloem, the Dutch head of the Eurogroup of finance ministers, was foolish to suggest on March 25th that the Cypriot deal represented a template. The part of the deal he was trying to suggest would be repeated was that if banks fail, creditors can expect to pay the whole bill. This was intended to re-establish the principle of moral hazard.

The trouble is that creditors in this sense could be seen as including depositors if you are going to confiscate some of their deposits.

So within hours he was back to calling the deal a "one off" after the markets reacted badly.

I hope it is a one-off: confiscating bank deposits is not the answer.


Anonymous said…
"taxing bank deposits is a really, really bad idea."

Isn't that what's happening here in Britain?, hammering the savers.

Chris Whiteside said…
Yes, I'm afraid it is.

But here it is currently being done by negative real interest rates, which is very harmful in the medium and long term but survivable in the short term.

By comparison, if you take money from the deposits of savers by openly negative nominal interest rates, or by outright confiscation, which is what happened in Cyprus, the results can be catastrophic in the short term as well as the medium and long term.

Popular posts from this blog

Nick Herbert on his visit to flood hit areas of Cumbria

Quotes of the day 19th August 2020

Quote of the day 24th July 2020