Why Cyprus May be BULLISH for the Eurozone
There has been a lot of discussion lately about the Eurozone bailout of Cyprus. Many pundits have focused on the horror of the fact that the Eurozone is planning to tax/levy/whatever the deposits of depositors who have money on deposit with Cyprus’ insolvent banks, in amounts above the insured limit. A lot of the bru-ha-ha arose because originally, the plan was apparently to tax even the insured deposits.
I think we can all agree that the insured deposits should not be taxed, levied upon, or in any way subjected to losses in the bailout of a country and/or banking system, and that no plan should ever have been floated that did so. When a bank deposit is insured, that has to mean something, or the banking system can have no trust.
However, it is perfectly acceptable for the non-insured deposits with these banks to be taxed, levied upon, or otherwise wiped out. And the fact that the Eurozone is willing to do so, indicates that there is a level of confidence in the system that has been missing, and that is often missing in the United States.
Here is what the populist depositnistas appear to be missing: bank depositors are creditors of the bank. The whole point of creating some sort of deposit insurance is to ameliorate the worst impacts of this. But nowhere is it written that uninsured deposits should be de-facto insured by tax payers. That is what people opposed to this are really saying. In a normally-functioning economy, when any corporation fails, it is the shareholders who get wiped out first, but the creditors, usually bond holders typically get wiped out as well, at least in part, and often in full.
So in fact, the Eurozone and the government are taking nothing from these non-insured “whale” depositors. Rather, by making them bear anything less than a total loss, the Eurozone is actually giving the “whale” depositors the remainder as a partial bailout, which they would not otherwise get as uninsured creditors of an insolvent banking corporation. That the Eurozone is willing to do this is perhaps foolish, but is also perhaps a sign that markets, and governments’ perception of their fragility, is returning to a more pre-crisis, market-oriented posture.