The EU has utterly mishandled the Cyprus banking crisis. By imposing a levy on depositors bailed-in much to their regret, while exempting bondholders, it has twisted and upended the hierarchy of creditor risk. Savers are bound taking the brunt of the € 6 billion restructuring, in a move that amounts turning things upside side down.
Plans for a common deposit scheme guarantee have suffered a severe blow while financials in the Southern countries are severely hit. Lack of confidence is sweeping away efforts undertaken under the banking system to shore up this vital industry. The ECB and the Commission alike come out with a tarnished record. No one will in future pay much credit to their vow to preserve small savers’ money.
Was it necessary to impose such a hard medicine for a bail-out amounting to roughly €10 billion? The only plausible answer lies in the forthcoming German general elections bound to banish all common sense for future months. Even so extensive damage has been inflicted at no visible benefit.
The EU establishment adamantly emphasizes the decision to tax small deposits by a huge 6.5% levy was taken by Cyprus authorities in an attempt to safeguard Russian inflows of capital. Even if Nicosia sharply reduces the levy for ordinary people considerable harm has already been brought about by irresponsible mismanagement of the crisis.
Let’s hope it peters off swiftly without translating into a massive contagion to other vulnerable countries. Nervous savers might elsewhere take out their deposits endangering financial stability. A dreadful scenario likely to drive us back to step one, fueling again a turmoil we thought was definitively subdued.