here.
Month: March 2013
I thought I would hoist this comment by Gary O’Callaghan onto the front page:
Karl observes in his article that Ireland’s citizens must be feeling foolish today: “After being reassured time and again that all depositors and senior bond creditors of … Anglo Irish Bank must be saved in the name of European financial stability, they find out that Europe’s leaders now believe hair-cutting depositors is fine and fair and doesn’t cause contagion.”
In a related dynamic, there appears to have been a subtle turn by many commentators (including on this site) from the “serves them right” school of economics. That School, most righteously established by LBS, argued that Irish taxpayers should carry the can for bank losses because they “should have” sought better supervision on banks. Many from the same School now appear to argue that depositors (creditors) “should have” been more careful in the Cypriot case and deserve to suffer for their stupidity. Serves ‘em right!
Of course, there is a practical limit on the burden that Cypriot taxpayers can bear in this case but such considerations never bothered the LBS School before. Do they now grant that Irish taxpayers were not fully “to blame” (and that burden-sharing from bondholders was warranted)?
Would they now agree with Karl that “the moral grounds for a retrospective compensation deal for Ireland have increased substantially with this new development?”
The problem with theorizing from morals, of course, is that the ground can shift (and come back to meet you).
I am tempted to add that if we ask “cui bono”, there may be less inconsistency here than at first glance meets the eye.
There are many angles to the Cyprus events. One issue is the value of foreign-currency deposits:
1. for a euro area investor, there will be some range of judgements about the relative safety of euro-denominated deposits in different euro area countries. If one wishes to shift into a non-euro deposit, currency fluctuations map into volatile returns once the conversion back into euro is taken into account (unless a currency hedge is also purchased). Since summer 2012, both the dollar and sterling have depreciated by about 9 percent against the euro so foreign-currency deposits can experience significant capital losses (or gains).
2. for a non-euro investor, holding a euro deposit carries the symmetric currency risk. For example, the rouble has appreciated by about 11 percent against the euro since summer 2009 (so that Russian investors in Cyprus have already experienced a significant capital loss over that time period). [The rouble depreciated by about 29 percent in late 2008 / early 2009, so euro deposits provided a very good hedge for Russian investors during the worst phase of the global crisis.]
3. currency movements are not predictable so ex-ante expected returns can look similar across currencies (interest rate differentials are typically small across the major currencies) but ex-post realised returns can be very different.
You leave the computer switched off during the holiday weekend, and look what the Eurozone does while you’re away! I guess we don’t know yet what the final outcome is going to be in Cyprus, and I fully share Sharon Bowles’ hopes that we haven’t seen the final word yet.
But if small depositors are going to take a hit, then, as a reminder of what we will have lost, here is a handy set of links to various EU documents and regulations regarding banking deposits. This citizen’s summary which reflects the media reports of the time helps explain why people have persisted in leaving their money in peripheral European banks for so long. It seems mad to tear this guarantee up on the grounds that Cyprus is sui generis, since as Tolstoy (almost) said…
Update: Tuesday morning, and we still don’t know what is going to happen; maybe the guarantee for savings of less than €100,000 will be honoured. But I fear that Karl and the many other commentators weighing in on the issue this morning are right, and that the long run reputation of the EU’s claim to guarantee such deposits will suffer a big hit as a result of this debacle, no matter what ultimately happens.
The deposit levy in Cyprus is a remarkable step in the management of the euro crisis – FT report here. Research on contagion indicates that it is limited if the ‘ground zero’ is sufficiently differentiated (and sufficiently ringfenced) from other potential targets.
Update: the WSJ provides a ‘blow by blow’ of how the deal was decided here.
By the way: St Patrick’s Weekend / Ides of March is a regular date for crisis events
St Patricks Day (March 17) (or I suppose the Ides of March – March15)
2006: Icelandic banks under pressure
2008: March 16/17 Bear Sterns takeover; also Anglo Irish shares fall 30% in one day (St Patricks Day Massacre)
2013: Cyprus!