Cyprus bail-in: a surprise?

by George Hatjoullis

EU / Cyprus Flag

EU / Cyprus Flag (Photo credit: eucy)

The proposed bail-in of the bank depositors seems to have been a surprise to many. The proposed tax on deposits below 100k is certainly unusual, but as I explained in my first post (Conflation and Confusion), quite consistent with a general trend towards wealth taxes. However, the possible bail-in of 100k+ depositors was flagged in the press well before Saturday, March 16.

The FT January 20, 2013, published an article written by Peter Spiegel in Brussels that included the following paragraph:

In addition to the IMF, several northern eurozone countries, including Germany and Finland, are pushing hard for a sweeping “bail-in” of bank creditors.

http://www.ft.com/cms/s/0/60df3ba2-6309-11e2-a832-00144feab49a.html#axzz2MVSshzIG

On February 10, 2013, the FT published an article by Peter Spiegel (Brussels) and Quentin Peel (Berlin) entitled ‘Radical rescue proposed for Cyprus’. http://www.ft.com/cms/s/0/1d17a320-736f-11e2-9e92-00144feabdc0.html#axzz2MVSshzIG

The radical part was a proposed bail-in of bank depositors.

The incoming administration of N. Anastasiades was hostile to the idea of a bail-in of bank depositors but this did not guarantee it would not occur. Indeed, recent history suggests that when the IMF and the northern eurozone push hard for something it has a habit of coming to pass. The logical reaction of prudent large depositors might normally have been to exit Cyprus banks for other jurisdictions. Indeed that was in part the response.

On March 3, 2013, the FT headline read Cyprus banks hit by ‘substantial outflows’. http://www.ft.com/cms/s/0/3918ff5e-841f-11e2-b700-00144feabdc0.html#axzz2MVSshzIG

You don’t say!

The substantial outflow was a rational, if self defeating, response to the press discussions of a possible bail-in of Cyprus bank depositors. The incoming administration did not need to ‘warn his friends’. They only needed to read the FT. The surprise for me was that, given these press reports, the Cyprus banking system had any deposits in excess of 100k on March 15, 2013. This also raises the possibility that some large deposits had nowhere else to go.

[ Also worth a read (http://on.ft.com/YOhI9I) dated december 21, 2012]

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