Cyprus is the latest European country to face a budget and banking crisis. Its deregulated banks have accumulated huge losses and now face imminent bankruptcy.
Like the United States government, the government of Cyprus guarantees most bank deposits against losses. So a failure of Cyrpus’s banks would result in a budget crisis for the government as well.
While it is easy to fault Cyprus for its failed policies, let’s not forget that the banking system of the United States of America collapsed five years ago. Little Cyprus (population 840,000) held out five years longer than the richest and most powerful country in the world.
What’s more, Cypriot banks have failed because they have engaged in all the risky business practices that US banks taught them. On top of that they implemented a US-style regime of self-regulation.
As a result, it’s no surprise that Bank of Cyprus is now going the way of Citibank. The surprise is that it took so long.
Unfortunately, the Cypriot government and the European Union are also following the US policy of bailing out their banks, letting managers and bondholders get off scott free.
[pullquote]To make bank depositors pay for a bank bailout is sheer robbery. There is no other word for it.[/pullquote]
In the US it was the taxpayers who paid the bill. In Cyprus, though, many of the bank depositors are actually foreign (rumored to be Russian). So in Cyprus they plan to make the depositors pay.
Like the United States, European Union countries provide guarantees to bank depositors. In Cyprus your first 100,000 Euros are guaranteed against losses if your bank goes bankrupt.
Any deposits over 100,000 Euros are theoretically at risk, but there’s a clear legal hierarchy of who takes losses and who gets paid. First the bank’s owners get wiped out. After all, they’re the ones who racked up the losses that bust the bank.
Next the bondholders — the professional investors who lent money to the bank itself — take their losses. Then, only after the pros have been wiped out, do the amateurs — the depositors — lose any money.
That’s the theory of what happens when a bank goes bankrupt. Except that Cyprus’s banks are not going bankrupt. To prevent a bankruptcy, the European Union wants the government of Cyprus to declare a one-time tax on bank deposits.
That’s right. If the government takes 20% of your deposited funds and uses the money to bail out your bank, your bank won’t go bankrupt and your deposits won’t be at risk. Of course, you’ll have only 80% of your money, but technically your 80% is still perfectly safe and guaranteed by government deposit insurance.
In other words, it’s the Great Cyprus Bank Robbery.
No doubt Cyprus has made many mistakes in its bank regulations and policies. But anyone who thinks that a country of 840,000 is making up its own policies is crazy. Cyprus has implemented the policies that the US and EU have recommended for it.
Now that Cyprus’s banks are in trouble, the EU is demanding that Cyprus bail out its banks — and make the depositors pay for the bailout. It’s no mystery why. Most of the bondholders who lent to Cyprus’s banks are banks in other European countries.
Cyprus should let its banks fail, then see where the chips fall. Depositors should be protected as much as possible. Ultimately, if there are deposit insurance bills to pay, the government should pay for them. If that means higher taxes, so be it.
But to make bank depositors pay for a bank bailout is sheer robbery. There is no other word for it. A lawyer may argue that legally it is a preemptive tax, but morally it is robbery all the same.