“Why hasn’t there been a run on the banks yet?”
A friend of mine posed this question to me in a conversation we had about midday on Thursday. The topic, of course, was Cyprus and, to the extent that the question related to the people of Cyprus and their banks, it was easy to answer: the banks have been shut all week and the ‘bank holiday’ has been extended until Monday – which is itself a holiday, so that means Tuesday. So there is not run because there are no banks open to run to, or from.
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New developments in the Cyprus crisis occur almost every hour – but you should still make an effort to keep up with what is going on there, even at the expense of your pre-holiday shopping, cleaning etc. – and certainly at the expense of reading/ watching the local production starring Bibi and Obama. This is because a) the Cyprus crisis is much more interesting and challenging, even for the detached observer; b) unlike the carefully choreographed puppet show in Jerusalem, no-one knows what is going to happen in this drama; c) it really does matter, which is to say: you are not a detached observer.
There are many aspects to the Cyprus mess, and hence many reasons why it is so important. However, the critical one should be obvious to regular readers of this column, in which I have repeatedly stressed that the essence of the entire European crisis is the loss of confidence on the part of the peoples of Europe in the leadership of their individual countries and of the EU as a whole. This was starkly highlighted by the results of the Italian elections last month, which were simply a revolt by the people of Italy against the unelected government imposed on them by Brussels/ Frankfurt/ Berlin, and against the political parties which sought to further the austerity policies of the EU/ Germany.
It is important to note that the Italian political crisis is entirely unresolved and is still simmering. That is par for the course in Europe at this stage of the overall crisis: nothing is resolved in a fundamental sense, but an effort is made to douse new fires that break out or, if this proves impossible, to contain the fire and prevent it spreading.
As for poor Cyprus, in and of itself it is not important. Its banks are bankrupt because the Cypriots allowed the Russian oligarchs/ mafia/ whatever to use and abuse their banking system. Because said banking system is seven times as big as the Cypriot economy, it is too big for the Cypriots themselves to save – but for the EU it is small beer. The Cypriots need only 17bn euro or so, but they are the fifth EU member to apply for aid and the political will in Berlin to keep paying up is now in short supply. The entities that actually put up the money for the European bail-outs – the European Central Bank, the European Commission, Germany and, in the background, the IMF, determined that the Cypriots must be made to pay a large chunk of their own bill.
In Greece this was done by imposing ‘haircuts’ on holders of Greek government bonds and thereby effectively wiping out large chunks of Greek debt. In Cyprus this approach won’t work, primarily because such Cypriot sovereign debt as exists is issued under UK (not Cypriot or Greek) law, and this precludes the kind of selective punishment imposed on the Greeks (where private bondholders were paid cents on the dollar, whilst bonds held by the ECB and other foreign entities were left untouched). It was therefore decided – no-one understands how or why, although the Wall Street Journal has made the best stab at unraveling the decision-making process – that a tax would be levied on all deposits of all the banks in Cyprus, irrespective of whether the account-holder was a local Cypriot or a Russian oligarch.
This decision is a landmark in European financial history. Countries like Argentina have been known to expropriate people’s money by fiat, but no-one believed that this could ever happen in an EU country – let alone that the EU would be the agency ordering the expropriation (a polite word for robbery). In the week since that decision was announced, the details have been juggled with and the proposal itself has been rejected decisively by the Cypriot parliament. It is not impossible that in the end the tax will not be levied – although the EU yesterday gave Cyprus an ultimatum to pass the law by Monday, or else it would stop providing liquidity to Cypriot bank, which would send them into instant bankruptcy.
But even if the robbery does not occur, the mere proposal has forever changed European and global banking and finance, by forever destroying the assumption that democratic government committed to the rule of law would never seize their citizens’ wealth arbitrarily.
Why this decision has not already triggered a run on the banks across Europe is not clear. But the license to crash the banks has been given and could come into operation at any time.