William K. Black
Slate’s Matthew Yglesias writes columns about economics and finance. Yglesias has been writing about Cyprus, and my critiques of the policies he has been proposing are the subject of this column. The short version of the background one needs to understand the issues is that Cyprus is in a crisis and the EU is willing to bail out its collapsing banks only if Cyprus raises revenues. The EU is unwilling to make the banks’ sophisticated creditors – the bondholders – take any losses. The EU wanted the banks’ least sophisticated creditors – the depositors – to take losses, even if their deposits were small enough to be within the deposit insurance limit. The reality, which the EU wishes to obscure by calling its proposal a tax, is that that the EU was insisting that depositors no longer be fully protected from loss by government deposit insurance. The EU demand was made shortly after the EU and Cyprus’ government pledged that depositors under the insurance limit would suffer no losses.
Cyprus’ government’s duplicity was prompted by its close ties to Russian oligarchs who deposit the funds they loot from Russia in the failing Cypriot banks. Cyprus’ plan, therefore, imposed a hefty (6.6%) loss on (smaller) insured depositors in order to keep the percentage loss on huge depositors well in excess of the 100,000 euro insurance limit under 10 percent.
The plan was terrible for Cyprus, terrible for insured depositors, and very dangerous to banks in the European periphery (because it could spark large withdrawals of insured and non-insured deposits from such banks). The plan was also a political failure that enraged most Cypriots into opposing the deal. Yglesias’ response to the plan was a March 18, 2013 column praising it: “Two Cheers for the Cyprus Bailout.”
The part that Yglesias liked best about the plan was causing depositors – including the fully insured smaller depositors – losses. The single worst aspect of a terrible plan is what Yglesias cheered. In fairness to Yglesias, he wrote that the losses imposed on the largest depositors should have been larger and the losses on the insured depositors smaller. He did not, however, call for Cyprus and the EU not to breach their promises not to force losses on the insured depositors. His position was that the magnitude of the betrayal of insured depositors be reduced (“It’s perhaps not possible to entirely spare middle-class savers, but they can be cut a much better deal than this.”) Yglesias’ one sentence summary of his position reads: “The plan to punish Cypriot bank depositors is hideously unfair, but it contains the germ of a great idea.”
Yglesias unintentionally reveals that this conclusion rests on a mistake of fact in this paragraph:
“Ever since the spectacular collapse of Lehman Brothers in 2008 and the ensuing financial crisis, regulators and politicians have lived by a single rule: No losses for bank creditors. The common thread of every bailout has been that banks pay off their debts in full.”
I agree that too many of the bailouts have bailed out too many creditors, but Yglesias’ statement is incorrect because it is overbroad. Depositors have not previously suffered losses, but banks have creditors other than depositors and some of them have suffered losses in bailouts.
Yglesias missed the obvious problem that having to put a “hideously unfair” plan to a vote in parliament is likely to lead to a rejection of the plan. (At this juncture, the MPs that voted unanimously voted to reject the plan.) How unfair and self-destructive (because of its terrible impact on depositors and banks in the periphery) a plan was the deal that Yglesias claimed contained “the germ of a great idea?” It was such an unprincipled betrayal that the German government denounced it.
“German Finance Minister Wolfgang Schaeuble, who blamed the idea of a confiscatory tax — and by implication, the market fallout — on the unelected technocrats at the European Commission and the European Central Bank.
‘We of course would have respected the deposit insurance that guarantees accounts up to 100,000 but those who opposed a bail-in — the Cypriot government, also the European Commission and the ECB — they decided on this solution and now they have to explain it to the Cypriot people,’ Schaeuble said.”
The Germans are the über falken on making bank creditors take losses in bank bailouts, so Schäuble’s denunciation of the deal demonstrates conclusively that it is indefensible. (Caveat: Schäuble was speaking for public consumption. There are indications that he proposed during the negotiations to inflict a far higher percentage loss on the uninsured depositors.)
The Bloomberg reporters explained the broader concern about the deal.
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