The thinking throughout both the U.S. and the entire Eurozone was simple yet dreadfully misplaced: enforcing market discipline on both bank creditors and bondholders would risk contagion. The politicos throughout both systems remain extraordinary weak in both their underdeveloped fortitude and political resolve. Bailouts were just easier.
What happened in Cyprus was a revolution in political thinking since 1999 when the Euro was adopted. Cyprus remains the first full bank failure since Lehman Brothers. Let’s review.
Small depositors will be saved. But bondholders and creditors along with depositors over 100k will take a huge hit. Both Laiki and the Bank of Cyprus will be put into resolution and restructuring.
Can you say rule of law!
We must remember that this was the back up plan after the screaming match between the Cypriot ruling class and the troika, meaning the European Central Bank, The European Commission and the IMF. In the end, Cyprus decided to deal instead of being left to rot.
It should be noted that the Eurogroup finance ministers spokesman Jeroen Dijsselbloem was cold, harsh yet straight on in his unwavering resolve. Unspoken was why Russia has such drastic capital outflows to Cyprus.
As for the Cypriot political class, what did they learn? They now know that overt govmint guarantees translate into a reckless game of easy capital formation breeding risk that can indeed bring about contagion. Noted is that Spain and Portugal are moving ahead with privatization plans; maybe someone should call the French.
What has not moved are the credit spreads in interbank markets. This is significant, especially given how the entire Eurozone has been rocked to its core. As for systemically important financial institutions, they’re still to big to fail. The solution: more Hayek less Keynes. A far more decentralized political economy, one similar to the 19th century would never have evolved into the moral hazard that now bestrides both Europe and the U.S.
William Holland
