Cyprus

Cyprus has its deal with the EU to resolve its banking crisis but the question is at what price? There is the usual bad bank/good bank resolution stuff and it is bad news for uninsured depositors. No-one will shed much of a tear for the Russian depositors but not much mention is made of Cypriot businesses with over €100,000 deposits. Insured depositors are safe (for the time being). Cyprus will now see a substantial shrinkage in its banking sector and in turn in the economy, which will make it difficult to meet the debt to GDP targets. The other thing that is not clear is whether the EU now has a template for dealing with banking crises in member countries or whether it is still moving on a case by case basis. One could be cynical and say that the EU is enjoying what it is doing to the Cypriot banking sector, which is effectively killing it off and making several Russian oligarchs pay. Malta and Luxembourg should beware; the big guns could be out for them as well. But when it comes to Germany’s own weak banks, it is the softly, softly approach. There are double standards in all of this. This ‘agreement’ and all the associated issues over deposits increases the chance of bank runs in other periphery countries. In the long run, this may be no bad thing as it will highlight the perennial problem of moral hazard and the risks within banking and so lead to a shrinkage in deposits to GDP. In the short run of course, it is the last thing we need. The final point, which applies to all of the periphery, is that a hard-nosed approach by Germany and the ECB is perhaps understandable but for such an approach to work, Germany itself need to make a concession which is that she must become the spender of last resort. This she has conspicuously failed to do.