CNN's Richard Quest breathlessly told the world last night everyone he'd contacted about the bank depositor "haircut" that is the centrepiece of the EU's bailout of Cyprus thought it was a really bad idea. One can only assume that Quest hadn't spoken to any German taxpayers, or to most of the parties ranged against Chancellor Merkel, because they no doubt think, at least for the moment, that this is an absolutely great idea*.
Quest's interviewees are right, though. This is a really nasty and dumb idea, and one that could have some very unpleasant consequences for the entire EU if it ever actually happens (which is looking doubtful at the time of writing). Let's look at some of the issues.
(1) Forcing a 6.75% haircut on lower net worth depositors in Cypriot banks, those with funds of less than 100,000 Euros, flatly contradicts the deposit insurance that these depositors were supposedly entitled to under EU rules. If this precedent is allowed to stand, it won't take any time at all before depositors in other countries that may need a bailout start to take their money out of the banks as a precaution. More generally, after an action such as this, what value does any kind of commitment by the EU have?
(2) Although the old idea of enosis may have been discredited, the relationship between Greece and Cyprus (and Turkey) is not a healthy one. The difficulties that have forced Cyprus to seek a bailout have to a great extent been created by the enthusiasm with which the island's banks loaned money into Greece, money which is now, of course, unlikely ever to be repaid. It's a replay, on a smaller scale, of the problems that sank the Icelandic banks a few years ago: taking on large-scale business that you have no reason to get involved in and don't fully understand. The citizens of the pariah Turkish Republic of Northern Cyprus must be enjoying all of this enormously.
(3) There's a further similarity with Iceland. A lot of the money that was deposited into Icelandic banks, and which allowed them to go on their ill-fated lending spree, seems to have come from Russia. Wealthy Russians have been putting money into Cyprus's banks for some time, and most of them will face the 9.9% "haircut" reserved for those with deposits in excess of 100.000 Euros. There seems little doubt that the presence of these investors was actually a positive inducement for the EU to impose the levy -- they wouldn't have done this if the deep pockets had been from elsewhere in the EU. This is simply immoral, and it's also where the whole idea starts to look not just foolish, but downright dangerous.
Not surprisingly, the Russians are furious, and Vladimir Putin has already railed against the plan. There's Russian money all over the EU, not just in the banks, but in the property market, especially in London and in more traditional havens like Monaco. If the Russians decide, or if Putin tells them, that the EU is no longer a safe haven for their money, the impact could be very severe.
In addition, of course, Russia is a key supplier of natural gas to Europe. Gazprom supplies more than 25% of Europe's gas needs. CNBC is already speculating that cutting off gas supplies is the most obvious way for Russia to retaliate for the losses that will be inflicted on its depositors. If that were to happen, German voters would without doubt quickly reassess their support for the bailout deal.
As it happens, I'm currently reading William Shirer's Rise and Fall of the Third Reich. The last time Germany sprang a nasty surprise on Russia, Operation Barbarossa in 1941, it didn't end well. This ham-fisted levy won't, either.
*Someone else who thought so, at least initially, was Matt Yglesias at Slate. While admitting it was "hideously" unfair, he argued that making large depositors consider the safety of the banks they use, rather than relying on deposit insurance, was a good principle. He's right, but it's not one you can impose retrospectively in the way that the Cyprus bailout deal does.
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