Cypriot events send worrisome message to savers and bank customers throughout Europe.

The dust is now settling on the wreckage of the Cypriot economy and its financial services sector. In a move that shocked many millions of people in Europe and elsewhere the European union , the ECB and the IMF imposed a bailout on Cyprus that included the seizure of a substantial chunk of those savers with deposits in excess of 100,000 euros the level at which deposit insurance no longer applied. Savers beware! According to these institutions bank depositors are viewed as  creditors of the banks. If something goes wrong their savings may well be on the hook if they surpass the deposit insurance levels and possibly even if they don’t if we pay attention to the first pact that they tried to impose on Cyprus but which its politicians unanimously rejected.

The victims of this seizure or bail-in as the EU euphemistically is calling it may lose as much as 60 % of the value of their accounts above 100,000. As compensation account holders will receive shares in what is now a bankrupt bank.

What a signal to send to people who bank in the Eurozone !

Some if not many of the people affected will be Russians who did business in Cyprus. Some of their accounts may be suspected of being illicitly acquired or moved offshore to avoid taxation. But they are not the only people affected. Many others are British or European citizens who have retired to Cyprus and unfortunately have transferred a good chunk of their life savings to Cypriot banks.

In at least one case a British couple had just transferred the proceeds of the sale of their home in London to a Cypriot bank as part of their retirement planning. A large chunk of their savings have been seized. These are then personal horror stories for the people involved many of whom are totally innocent savers or legitimate business people. So what has the EU accomplished with these measures ? Well the euro still exists in Cyprus but it is a radically different currency from the euro elsewhere in the euro zone. For one thing it cannot be moved or transferred, except in very small sums, out of Cyprus because of the capital controls put in place. The economic damage despite the bailout is substantial and will continue for a long time. Cyprus’s banking sector is now wrecked and it will be a very long time before anyone trusts it again. But more than that savers elsewhere in Europe will now be much less trusting of their banks. There will be a growth in hoarded funds kept out of the banking system and these hoarded funds will have a much diminished role in facilitating economic demand. Coupled with austerity recovery from the slump will be more difficult.

Could it have been done differently ? The answer is an emphatic yes. The 6 billion or so euros being raised from the seizure of deposits could have been financed for example through a more flexible policy adopted by the ECB, as well as the other players. The amount involved is small relative to the balance sheet of the central bank. Remember Cyprus is a tiny portion of the Eurozone GDP.

People in countries like Spain, Greece,Portugal, Ireland and elsewhere in Europe will not forget what has transpired in Cyprus under the auspices of the EU, the ECB and the IMF. This will have a dampening effect for a long time to come.

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About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
This entry was posted in austerity, business cycles, Cyprus banks, deficit hysteria, European unemployment and tagged , , . Bookmark the permalink.

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