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
    +3

    Comment number 201.

    30. Mr Jones
    Don't be surprised if the next Labour Governmenet does the same thing to savers as is now happening in Cyprus.
    __
    The current government has done a pretty good job of "making hard decisions" and taking the money by stealth, and I'm sure if the "right answers" don't emerge, they'll do something else.
    This really is not a 'party' issue - it's save the banks, sacrifice the people time

  • rate this
    0

    Comment number 200.

    176.
    Mike Birks


    "Cameron should bring forward the referendum as soon as possible. Let's get away from this rabble in Europe. They cannot be trusted so why do we think we should be part of it?"

    I am actually heartened that at last it seems that there might be a painful but necessary sort out which might lead to a less poltically idealised and more realistic EU .

  • rate this
    0

    Comment number 199.

    Have a look at the business pages. EU banks share values crashing, Asian money exodus.

    A 10 year old with the Ladybird Book of International Finance could have predicted it. But not, it seems, the EU leadership.

  • rate this
    +1

    Comment number 198.

    If this goes ahead the EU will be destroyed as trust and regulation has been broken on so many levels. Europe will destroy itself from inside, dog eat dog style and then fail.

  • rate this
    +2

    Comment number 197.

    the cost of not controlling your own currency
    during an economic recession is too great
    Cyprus like other southern countries
    should exit the euro
    return power to national central banks
    which could support depositors up to an agreed level
    in new banks deposits if the old banks share holders
    do not think their investment is worth putting their own
    money in to support
    time to end troika depression

  • rate this
    +6

    Comment number 196.

    EU Goverments are nothing more than legalised Mafia. These Governments collude with banks and corporations to legalise the wealth transfer from ordinary citizens into the pockets of politicians and their cronies. Your tax money and pension funds were not enough for them. They want it all. They will empty your Bank account in a heart beat. Cyprus is just the test ground.

  • rate this
    +2

    Comment number 195.

    Agree this is wrong but don't forget that a lot of the UK residents in Cyprus (particularly pensioners) turned their backs on the UK in exchange for an amazingly low tax regime in Cyprus. They have enjoyed the benefit of this while the rest of us struggle on paying our way in Blighty.

  • rate this
    +6

    Comment number 194.

    180:

    Actually, governments can steal gold, very easily indeed. Even the US did it in 1933. They simply declared the private holding of gold to be a criminal offence, punishable by a huge fine and up to 10 years in prison. Their argument was that private "hoarding" of gold was anti-social and against the "national interest".

    What's to stop a state doing exactly the same today?

  • rate this
    +3

    Comment number 193.

    The EU was not per se responsible for the Greek write down, the Greeks were! It's like blaming the bailiffs when people go into debt.

    Did the EU make the Greeks spend way beyond their means without collecting the taxes to pay for it?

    Watch the Eurovision song contest, turn the sound down, who votes for who? blood is thicker than water, you have your linkages laid out in front of you.

  • rate this
    +5

    Comment number 192.

    171. A Realist
    The Germans are not barking mad, they are rightly getting fed up with having to bankroll the rest of lunatics in the madhouse. Time for them, and us to leave, taking the few sensible countries left with us and start anew. The French need not apply!

  • rate this
    +5

    Comment number 191.

    Looks like the BBC are censoring any adverse banking comments vis-a-vis:

    LIbor bank deception and the ''bank robbers'' at the ECB today & ''bank robbers'' caught ''money laundering' at the HSBC and fined by US Courts for that bank ''money laundering''.

  • rate this
    +3

    Comment number 190.

    And still the bankers get away with it! Instead of attacking savers how about clawing back all bankers' bonuses for the last 10 years.Banks here and in Europe are still showing poor results or even losses yet their employees are still being paid obscene bonuses.

  • rate this
    +2

    Comment number 189.

    Jason @173 ... the EU, by taking steps to reduce the value of Greek debt, has followed the precepts of technocrats imposed on Greece. Do you think the people of Greece would have voted for austerity? Do you think the people of Cyprus would have voted for this bank raid? When you claim the EU is responsible, you are overlooking the reality - unelected financiers are trying to save themselves.

  • rate this
    +3

    Comment number 188.

    Robbery officially approved. Plebs! save all your life to give your money to the poor bankers! That is what you deserve. It is your fault why did you not become a banker in the first place!

  • rate this
    +2

    Comment number 187.

    165: Good Gosh, are you still using Cash ?
    Tinned Food, and less perishable staples are a better investment.
    Afterall, a Pound/Euro or Dollar may not hold its value, but a tin of Beans will always be lunch.

  • rate this
    +1

    Comment number 186.

    global banking, worldwide ripoff money getting dirtier not cleaner

    local banks smaller the better

    lending only works if the borrower lives within the country of the lender

    start small

  • rate this
    -18

    Comment number 185.

    Talk about looking a gift horse in the mouth. EU raiding bank accounts? No, its EU saving them, because if they didn't do this then those people would lose everything as the banks collapse.
    At the end of the day, you'd complain about EU spending even more of "your" money, bailing out banks without account holders chipping in.
    This is probably what will happen in UK next time.

  • rate this
    -2

    Comment number 184.

    David versus Goliath...... good luck David, you deserve to win!

  • rate this
    0

    Comment number 183.

    @103
    As someone who has dealt extensively with Russian firms in Cyprus, I can tell you for a certainty that Cyprus is NOT a tax haven or money laundering centre for russians. They use Cyprus to do business in the EU, because there is less red tape, and the common law is used.
    Russians wash their cash in the CIS, where they can keep tabs on it, and they mix it with NATO money in Pakistan.

  • rate this
    +3

    Comment number 182.

    Germany could always will NOT lend them the money. In which case, the banks will collapse and the Cypriot people will loose all their savings.

    Perhaps paying 6.75% to keep 93.25% would seem like a bargain then.

 

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