By Walter Russell Mead
Bank runs in Europe? The EU made them a little bit more likely this weekend, and as Cypriots stampede for the shrinking number of ATMs still handing out cash on the island, Italians, Greeks and Spaniards are also beginning to wonder if, with interest rates effectively at zero and confused politicians running Europe’s bank systems, the mattress might just be the safest place for their money after all.
Monaco was once famously called a sunny place for shady people; Cyprus deserves that description today. The Greek chunk of the island, target of the latest flawed European bailout plan, runs what is easily the shadiest banking system in the Eurozone. Russian oligarchs use the island’s banks as a combination piggy bank and money laundry, and partly as a result the island’s financial system is larger and more complex than a small island economy would normally need. Largely because the Cypriot bankers invested lots of their clients’ cash in Greek bonds, the financial system is underwater, and the IMF, ECB and the other usual suspects have tried to figure out what to do.
By the world’s post 2008 standards, the €13 billion that Cyprus needs is chump change, and with four bailouts down, the EU has world’s most experienced national bailout team on the payroll. So Cyprus should have been easy, but this time the financial wizards had a problem. German taxpayers have a strange prejudice against bailing out Russian oligarchs, and to back a bailout of the banks in which depositors got their money paid in full is political suicide in the land of the currywurst.
Since no bailout can go forward without a big fat check from Chancellor Merkel, a woman who never forgets she faces elections this year, the authorities decided to do something different. In an unprecedented move, the EU decided that this bailout will be partially funded by a tax levied directly on very large deposits that sit in the banks. The NYT has more:
Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than 100,000 euros effective Tuesday, hitting wealthy depositors — mostly Russians who have put vast sums into Cyprus banks in recent years. But even deposits under that amount would be taxed at 6.75 percent, meaning that Cyprus’s creditors will be taking money directly from pensioners, workers and regulator depositors to pay off the bailout tab.
Nobody has much sympathy for the oligarchs caught in this trap, but there’s been a lot of publicity about the poor, innocent Cypriots who will be taking a haircut. Via Meadia is not as sympathetic as we’d like to be. Any sentient depositor in a Cypriot bank had to know that things weren’t right. The dubious nature of the Cypriot banking system has been a notorious fact for almost a generation; during all this time Cypriots seemed perfectly happy that their country was running an offshore money laundry for some of the nastiest people around.
Furthermore, the Germans have made no secret of their hatred and loathing of the idea of bailing out kleptocrats with public funds. Smart Cypriots took their money out of these casinos months if not years ago; there is no right to make stupid decisions and have the world bail you out. It’s harsh, and we would rather see people spared such pain, but ten percent seems like a reasonable tuition payment for some very important life lessons: don’t let your country’s financial system turn into a notorious international sinkhole, and don’t sit passively as disaster approaches, trusting as Blanche DuBois would say to the kindness of strangers.
That said, European financial markets could be more interesting than usual this week. The European financial authorities are swearing up and down that they will never, ever do anything like this again and that the rest of Europe’s banks are as sound as the euro itself, but that of course is exactly what they would say if they were planning to take much of your money away.
If enough Europeans think enough like Blanche, the next week will be calm, but on Monday and Tuesday especially, the world’s attention will be riveted on southern Europe, hoping its bank customers think like Blanche and assume come what may that the kindness of strangers will bail them out and keep them whole.