As we await the detail from Cyprus of exactly what the practical consequences will be of the bailout deal (in particular, confirmation of how much large deposit holders in the different Cypriot banks will lose, and how capital controls will be imposed to avoid a flight of cash from the Island's banks) it is perhaps a good time to consider what the wider implications might be for other EU countries and in particular the key financial centres within the Eurozone.
The Cypriot bailout was quite remarkable because it seemed to mark a shift away from a situation where tax payers assume the responsibility for bailing out troubled banks, to one where large depositors and bond holders bear the brunt when a bank fails. There was undoubtedly a lot of political posturing at play in what happened in Cyprus - the fact that so many of the Island's large deposit holders were Russians rather than Europeans clearly had an impact on decision making, particularly in Germany where an election looms and there is great public antipathy towards the idea of German tax payer's money being used to ensure that Russians crooks (as they tend to be portrayed in the German press) are not left out of pocket. Had the majority of large deposit holders been EU residents then I am sure we would have seen a lot more angst about whether it was appropriate for them to have to shoulder the burden of the bank failures. So the question is, does the Cypriot set a precedent or can it be viewed as a one off?
In a spectacularly ill-judged comment, Jeroen Dijsselbloem, the Dutch finance minister, set hares running earlier this week by suggesting that what had happened in Cyprus could be used as a template for any further bailouts that might be required in the future in the Eurozone. It does not take a rocket scientist to see how even a suggestion that large depositors in other jurisdictions could face similarly draconian measures would lead to a flight of capital out of the struggling PIGS and into safer havens, exacerbating an already difficult situation. It was therefore no surprise to see his statement rapidly followed by hasty retractions, and statements saying that Cyprus was a special case and did not set a precedent. But is is really true?
What made Cyprus different from Spain or Greece or Portugal seems to me to be down to two issues - firstly that fact that it is a much smaller country with a relatively small population in European terms, and secondly that it has a banking sector which is very large relative to the country's GDP, as a consequence of its tax haven status. But aren't there indeed other jurisdictions within the Eurozone which also have disproportionately large banking sectors because of attractive tax regimes? And aren't some of these also relatively small countries? Malta, for example, has a banking sector which is approximately 8 times its annual GDP whilst Luxembourg's is closer to 20 times its GDP, and both are relatively small in population terms. In what way are they really different from Cyprus? Are we now reaching a position where bailouts for countries with big international financial services industries will be dealt with on a different basis from those which do not have this? Or where only depositors in small countries will have to bear the losses of bank failures? Can the EU really afford to make such judgements, when the whole point of the EU was to have a single unified market? It seems to me that what has happened in Cyprus could prove to be extremely divisive amongst EU member states as the implications are worked through.
I am astonished that for the relatively small sums involved in a Cypriot bailout that the EU have put a big question mark over the stability of banking arrangements in so many Eurozone member states.
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