Cyprus rescue breaks all the rules

People queue outside a branch of Laiki Bank in Nicosia, Cyprus

Reform of how to mend broken banks, which has been negotiated globally and in Europe since the Crash of 2007-8, has been based on two central principles.

First, that the savings of ordinary people should be protected, up to a high threshold - or 100,000 euros in the European Union for example.

And that financial institutions which lend to banks by buying their bonds should incur losses when banks are bailed out: bondholders should, to use the jargon, be bailed in, as part of resolution plans.

The logic behind these tenets is simple: financial institutions ought to be sophisticated enough and informed enough to assess the risks of lending to a bank, and therefore deserve to be punished when their judgement is awry; most of the rest of us can't possibly know if our high street banks are making reckless gambles.

Twitter Q&A

Question from Terry: If Cyprus has such a small economy in global terms, why is this crisis having such a big impact world wide?

Robertanswers: Because it creates the risk of money being moved out of other weak eurozone banks, thus setting back recovery of eurozone

The hope is that the kind of big investors which buy bonds would put pressure on banks to stick to the straight and narrow. And that retail savers are so confident that their money is safe that they never feel the urge to behave like the customers of Northern Rock in September 2007 by descending in a mob on branches and withdrawing every last cent.

So what is seen by many as profoundly shocking about the terms of the rescue of Cyprus by the rest of the eurozone and the International Monetary Fund is that both of these principles have been broken.

Retail savers are being punished, by a levy of 6.75% on savings up to 100,000 euros.

And bondholders aren't being touched.

How did this happen? Well as I mentioned on Saturday the German government was determined that the Cypriot rescue should not be seen by German taxpayers as in effect rescuing Russian money launderers with deposits in Cyprus.

But a deal that might just be approved by the German parliament has resulted in serious collateral damage to the credibility of policymakers in the eurozone and the IMF.

The Cypriot deal sets back the cause of the new global rules for bringing order to banking systems when crisis hits. Apart from anything else, in other eurozone countries where banks are weak, it licenses runs on those banks, as and when a bailout looms.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 1361.

    1312 " If she (thatcher) hadn't privatised the utilities, we would have been paying a lot more thanks to the extortionate blackmail of the power unions which was driving power prices to industry and to the public to unsustainable levels."

    Remind me. How much do they pay for power in Europe? (And remember we're subsidising that price after the fire sale of state assets)

    Utter buffoon

  • rate this

    Comment number 1360.

    The banks & financial institution have had it their way for too long. It is time the people fought back and take what is rightly theirs. I totally support a HUGE run on these banks when they reopen. Just so these banks can remember whose money they've been gambling. Enough is enough! The people won't tolerate this much longer

  • rate this

    Comment number 1359.

    democracy @1352
    "direct democracy"
    (needs only)
    "political will"

    NOT to deny the potential high value of what you describe and propose, but still the issue remains of 'equal freedom', not just to 'press a button' once or twice or even one hundred times a day, but the certainty of equal freedom to fund the MAKING of cases

    Without Equal Partnership, such doubts as @1353 (sw) will RIGHTLY 'trouble'

  • rate this

    Comment number 1358.

    A discretionary tax on wealth rather than income.

    It's not just in Cyprus that savers are seen as an easy touch.

  • rate this

    Comment number 1357.

    This tactic would seem to be a classic way to initiate the one thing that would be precipitous to any kind of economic recovery - namely a run on the banks - not necessarily because the banks won't be there but because it can be taken by an elected government without having the consent of their people.
    As usual it will be the little people who will suffer while those who canmove funds will do so.


Comments 5 of 1361


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