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 401.

    Unless I am missing something have the EU not just started a run on Cypriot banks and from there Greek banks?

  • rate this

    Comment number 400.

    The fundamental principles of taxation in democracy are that taxes are imposed in accordance with ability to pay. This theft creates arbitary charges on people who are least equipped to afford them. And, what makes this distributional consequences even worse, is that whilst depoitors are being hit, the senior creditors who own the bonds, will escape scott free.

  • Comment number 399.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 398.

    Good to see Robert mention the run on Northern Rock.

    Can someone remind me who it was who was the major cause of that run with his pronouncements on the BBC.

    A shame that same person will not "come out" and tell us that it is the Euro itself that is the problem and the longer it takes to break up the worse it will eventually be!

  • rate this

    Comment number 397.

    Robbie, to an extent yes. We what ever country we live in. As long as it's supposed to be a democracy.
    Although the particular point I was making was to do with the Russian mafia in Cyprus, not so much the politics. They are in Cyprus in massive numbers and because they bring in money the people seem happy to have them.

  • rate this

    Comment number 396.

    #378. mog499
    'Call me old fashioned but I want interest on my savings'

    Call me old fashioned but i'd like to have some savings :)

    Where do you think the magic-money of Interest comes from?

    From 1990-2008 i suppose it really did come from the banks creating it out of nothing, but the wheels have fallen off that particular scheme.

    It comes ultimately from other peoples labour, not yours.

  • rate this

    Comment number 395.

    Being German, I know that this is not the first time in history that this has happened. The alternative is to wake up one morning with all your Euros gone and a few units of a new currency in your bank a/c. The latter happened twice in my parents' lifetime. No safety in real estate either, the state simply puts a mortgage on it.

  • rate this

    Comment number 394.

    Those 2 "rules" created the crisis, the moral hazard, they do not solve it Robert Paterson.

    If you want to solve it, simply remove the government guarantee to all banks that they'll get any bailouts. Let the risky, speculative, banks fail instead of rewarding them - to the more honest operators' detriment.

    Also: Remove Limited Liability of directors, make them liable.

  • rate this

    Comment number 393.

    I couldn't quite believe it when I first heard this story.

    It's completely unfathomable that any government could legally? dip it's hands into people's personal accounts without warning or prior consent.

    This is capitalism at it's worst. China is looking like quite an attractive proposition!

  • rate this

    Comment number 392.

    EU and Euro are an giant financial and economic house of cards, a burning building with no exit.The European way of life is to live far beyond what you earn.The EU project is to keep it going that way indefinitely.The basic plan is fatally flawed.So many holes in the dyke and the sea that's pushing against it an irresistible force who could tell which hole would be the one to start the collapse?

  • rate this

    Comment number 391.

    Trojandog 340

    There is zero chance of Cameron ever being allowed to hold an EU Referendum anyway. Big Business that finances the Tory party would withdraw their donations and support.
    Just like Murdoch has forced Dave to ignore the Leveson report and water down regulation. Murdochs dinner with UKIP last week was just a means of cranking up the pressure on Cameron. And Gutless Cameron obliged!

  • rate this

    Comment number 390.

    If governments are encouraged to just steal, and lets face it, it is stealing, up to 10% of normal peoples savings, then the need for direct action becomes paramount!
    Time to revolt against these financial idiots & their politician puppets.
    The EU (Germany) is setting a very dangerous precident that will lead to massive civil unrest!!!

  • rate this

    Comment number 389.

    What this shows is the STATE backed insurance on any savers money is as thin as highly stretched toilet paper. Just a few drops of rain &PING

    "How come?

    Well they dont need to be good with the promise that your money is safe if while it "appears" to be in the bank they can take it from you be it through a "LEVY" or , as in this country low interest rates +high INFLATION/ QE/ Debasing of the£

  • rate this

    Comment number 388.

    Inflation has cost UK savers much more than 6.75% since the UK bank bailouts... the Euro will largely protect Cypriot savers from inflation, so in the long term they are probably much better off!

  • rate this

    Comment number 387.

    Aye, it's not what's going on around us it's what's happening at home.
    Public sector workers who look after our kids and old are bored of being cast as if they are sitting smoking fags all day. Private sector workers are bored of being valued even less.
    Savers being fleeced, ppl in debt being fleeced.
    The final straw is being placed on the camel now.
    Come near me or mine "I will break u".

  • rate this

    Comment number 386.

    @367 Clucking Bell:Will not happen as the Cyprus "elite",who have done very nicely thank you from the dodgy rouble influx,do not want to upset their rich Russian chums if they can possibly avoid doing so.The Russians were probably tipped off in advance anyway so their cash will be long gone.

  • rate this

    Comment number 385.

    @382 ravenmorpheus2k: "Savers want to consider themselves lucky instead of crying "theft" all the time...."

    And apologists, such as yourself, want to fool people into considering themselves lucky, rather than as victims of theft.

    You hear him, people? Don't complain about theft. Just consider yourselves "lucky". Yes, just let the thieves "get away with it" without any kind of condemnation ¬_¬

  • rate this

    Comment number 384.

    blacksheep44 - your conveniently poor memory serves you well.

    And your inability to back up your claim surprises me not one jot.

  • rate this

    Comment number 383.

    Anyone who keeps lots of savings in a Bank is asking to be robbed by government and deserves to be. Put that money into the ecconomy. Buy shares. Buy property. Buy investments. That is what the ecconomy needs and if you don't the money will be stolen from you by inflation, quantitative easing or just taken like in Cyprus.

  • rate this

    Comment number 382.

    Many savers in the UK have had 40-50% of their savings stolen by stealth...

    Only 50% of their savings. Gosh!

    Some of us have never been paid enough to have any savings.

    Just think what it's like for us in such a devalued economy.

    Savers want to consider themselves lucky instead of crying "theft" all the time....


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