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.

  • rate this

    Comment number 1356.

    My comment (question) goes for the next article: "why Cyprus's rescue matters to us". They difference about to punish Russian lenders to Cypriot banks (justified by german authorities) and lenders to Spanish and Italian banks ( who wouldn't be worried). Well, are the lenders of the Spanish and Italian banks?

  • rate this

    Comment number 1355.

    Robert suggests that the problem may have something to do with Russian gangsters and money laundering issues.
    Is it time for a serious investigation of such activities in the ' City of London' following the fines on some of our banks and their links with international drug dealers and their money laundering activities?
    Does the UK government have any financial jurisdiction in the Cayman Islands

  • Comment number 1354.

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

  • rate this

    Comment number 1353.

    2 Minutes ago
    "If you could be sure of tamperproof Internet, you could have true Democracy."

    It's already been done, several times. All you need is a checking mechanism.


    This reminds me of 1984 and the tv in the corner of the room monitoring everything going on.
    The checking mechanism has the potential to be the controlling mechanism.

  • rate this

    Comment number 1352.

    "If you could be sure of tamperproof Internet, you could have true Democracy."

    It's already been done, several times. All you need is a checking mechanism.

    Everyone votes on the issues, and there are ten days to see your vote posted and alert authorities if tampering occurs.

    There are no practical obstacles to direct democracy. Only a lack of political will prevents it from emancipating you.

  • rate this

    Comment number 1351.

    Hammer @1349
    "Citizens propose"
    Line-by-line informed scrutiny?

    Who to write programme to integrate every suggestion, informed, confused or not, for 'questions to be put'?

    Who to formulate 'information' upon which we might base decision?

    Recall Deep Thought and NHS IT billions

    Rather than vainly seek to 'emulate' outcomes of integration, why not end social exclusion, adopt Equal Partnership?

  • rate this

    Comment number 1350.

    If all people had total control evil chip implants how would we stop them taking the money/credits off of our implanted chips then ???

    The EU has some good points however it of course has stupid points that need fixing. Remember the EU was suppose to be or should be just a single currency and not anything else. Cyprus could of handled this much better. (Bit of an understatement but anyway).

  • rate this

    Comment number 1349.

    1346: If you could be sure of tamperproof Internet, you could have true Democracy.
    Citizens propose their own Laws, and Vote via the Internet to decide if a law is ratified.
    But of course who can really trust the Internet, or indeed, the People.......

  • rate this

    Comment number 1348.

    All the Eurocrates and politicians Are playing a very dangerous game crossing the Russians. never mind the ordinary people. I am just waiting for them to start to die mysteriously like a lot that cross the Russian mobs.

  • rate this

    Comment number 1347.


    Which suggestion more improbable?

    One from democratic logic, that Equal Partnership would prove best for all, its weakness only in being unknown, talked-down, and not available for prior inspection (except in - good - marriage, business, philosophy & Dumas imagination)

    THE other(s)? Topped by Switzerland, available for inspection, 'somehow' not catching-on?

    WHENCE issues?

  • rate this

    Comment number 1346.

    It is easy to know too much of what is impossible.

    I do not speak of possibilities, but of actual systems.

    Any nation on earth could adopt a version of the Swiss constitution, and thereby have what you claim is impossible.

    Direct democracy is not only proven possible, it has been proven successful.

    Only a lack of political will prevents its adoption throughout Europe and beyond.

  • rate this

    Comment number 1345.

    All this over trying to raise 5 billion euro.. Why does the EU want 5 billion so they can then lend 10 billion ? Why didn't they just take it off the 10 & lend 5 billion that would of been so much easier..

    Why does a bailout involve asking for money ??

    All this because banks need money because of their own lies & gambling. Take from bankers bonuses & savings in the last 10 years only !

  • rate this

    Comment number 1344.

    "breaks all the rules"? Not. The only rule for the last 30 years have been "save the banksters at all costs". Sorry, peons, we all serve the banks, Wall St., The City, now.....

  • rate this

    Comment number 1343.

    I am pro EU but this is ridiculous. What Cyprus should do is Nationalize the Banks, and put the bankers in jail. This should have been done here.
    As to the UK leaving the EU do it I won't live in a country that is no longer an empire and has nothing to show for it but a large collection of Crown Jewels that should be sold. As to here Osborne had on real job he folded towels at Selfridge's

  • rate this

    Comment number 1342.

    The EU is dead. It's the politicians wot dun it!


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