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The genie is out of the bottle over deposit guarantees

Cyprus Financial Crisis

The Cypriot bailout plan now hits large savers with deposits over €100,000 and some bond-holders.  After furious opposition it does not now raid the accounts of depositors holding less than €100,000.  The problem is that people know the government and the EU had planned to raid them.  And this applies to people outside Cyprus, people in other Eurozone countries seen to be at risk.  The genie is out of the bottle, and people will never regard bank savings in quite the same way.  They have a deposit guarantee, but if one country was prepared to renege on it, why not another?  Larry Summers, former US Treasury Secretary, said what amounted to the same thing to the BBC.

He was critical of the way European leaders had managed the eurozone crisis, saying they had created uncertainty in people’s minds, particularly over Cyprus.  Referring to the plan to tax all bank deposits, subsequently abandoned, he said: “A question has been lodged about what has previously been seen as absolute, the willingness to stand behind assured bank deposits.”

Precisely.  The genie is out of the bottle now, and it is not going back in.  I fully expect depositors in several EU countries to start taking money out of bank accounts and putting it somewhere they think might be safer.  I would not be surprised to see several banks suffer massive cash withdrawals.  A saver with over €100,000 in a bank in Spain, Italy or Portugal would think it foolish to take the risk of confiscation.  And while we’re on the subject, the ‘temporary’ capital controls in Cyprus effectively take the country out of the Eurozone, and are a very good reason for people not to put money into the country.  This is by no means over.

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