The BBC reports on the way Cypriot bank accounts are being levied as part of the “rescue”:
Cyprus may be one of the eurozone’s tiniest economies — its third smallest — but for the next 48 hours or so, it may be the single currency area’s most important.
The point is that there could be serious repercussions for other financially over-stretched economies, such as Spain’s and Italy’s, from the nature of Cyprus’s 10bn-euro (£8.7bn) bailout — which includes, for the first time in any eurozone rescue, losses imposed directly on depositors in banks.
These losses, running to almost 6bn euros, stem from an emergency levy of 9.9% on bank deposits over 100,000 euros (£86,600) and 6.75% below that.
The levy serves as a caution to lenders to banks that they should take care where they place their funds and avoid banks which overstretch themselves — as Cypriot banks did.
But precisely the same arguments — for what is known as a “bail-in” by private-sector creditors — were put by liberal-market purists at the peak of the banking crises in Ireland and Spain.
In the end, eurozone governments were terrified that if lenders to Spanish and Irish banks were punished, there would be a devastating domino effect of withdrawals of funds from banks in other weaker economies — a domino effect that would jeopardise the survival of the eurozone.
So, reckless lenders to Spanish and Irish banks were not punished.
There’s a strong possibility that savers in other European countries with weakened banking systems to draw the correct conclusion quickly … and start pulling their money out of the banking system. And also expect the EU to react with draconian currency restrictions. It’s a potential banking sauve qui peut.
