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 214.

    And still the Little Enlanders claim the whole Euro project will end in falilure - even though the Euro is strengthening against the £ the whole while.....

    ....the markets have more faith in the Eurozone than they do Britain.....

  • 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....

  • rate this

    Comment number 411.

    Most savers worked for years..

    Yes and you all think you have a god given right to be immune from the "crunch" as a result of that.

    Well, my mother, in her 50s, is now living in penury despite working just as hard as many savers have.

    You think you're being hard done by? Try living like her, and many others do.

    Then tell us you're not lucky to have savings in the first place.

  • 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 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.


Comments 5 of 1361



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