Bank deposits no longer rank as safe havens. Their open call into question under the Cyprus rescue will induce a lasting unease on savers, even if amounts covered by the EU-wide guarantee scheme were finally spared. This lesson doesn’t risk being easily forgotten.
True enough, Cyprus banks run rather unusual balance sheets, deposits leaving little room for other liabilities. No wonder any bail-in plan was forced to carve a deep haircut on them. The prospect a similar misfortune might happen somewhere else looks rather remote. Issued bonds and junior debt provide a comfortable cushion preventing deposit cuts from being triggered. The Spanish restructuring, for instance, could have been easily performed, under a bail-in assumption, without resorting to ransack account holders.
But the German diktat that bank creditors should bite the bullet stands as the most far-reaching lesson to be drawn from the Cyprus crisis. Optimists lure themselves in hoping this hard line will melt once the forthcoming general election is over. Being a policy issue prominently underlined in all main parties’ manifestos, the full safeguard bank creditors have enjoyed under past bail-out schemes seems doomed in future.
Germans, but also Finns and Dutchmen, show a growing reluctance to footing others’ gross mismanagement or profligacy. While governments in these countries are staunchly committed to preserving the Euro zone stability, they are becoming fed up of providing free lunches to their ailing Southern neighbours. The more so as public finances’ distress all too often derives from obstinacy in salvaging wholly rotten banking institutions, at no cost for creditors. Thus the bill is transferred from reckless investors abroad to home taxpayers. To make thing worse, citizens in beneficiary countries bitterly resent the stringent austerity plans that fall on their shoulders as a merciless punishment inflicted by the EU paymaster general.
Breaking down this unedifying vicious circle that only rewards unwise or greedy financial choices, undoubtedly involves forcing heedless creditors to pay for their carelessness. Enforcing full responsibility and moral hazard stand as the best medicine to avoid future banking disarrays. Furthermore bail-in would decisively contribute to prevent bail-outs from happening.
Some observers object the new approach as running contrary to the Banking Union package. While it delivers a deadly blow to hopes EU funding would underwrite any potential loss, people tend to forget that fostering resolution schemes stood as a cornerstone in reaching agreement. It was felt that letting down failing banks instead of tapping on taxpayers’ money was the best course of action in future. Moreover, no safe conduct was ever handed or promised to creditors, their past immunity being linked to national full bail-out decisions. Obviously countries willing and able to bear the cost of rescuing ailing entities will in no way be prevented from doing so, as long as their spendthrift attitude does not lead others to endorse the bill.
As good excuses are always found for reprieving and maintaining alive any banking institution whatever guilty or hopeless, the bail-in discipline will mainly fall on those countries whose public finances cannot absorb the disproportionate amounts banking holes usually involve without risking a destabilising run on their own creditworthiness. That’s exactly what Germany pursues: ring-fencing itself from bailing-out fellow partners indulging in lavishness beyond their means.