As I said in yesterday's "So Why All the Posts on Cyprus?":
It reminded me of Northern Rock....Here's Economix:
From Lehman to Cyprus
The European decision not to honor deposit insurance in Cyprus, by making all depositors contribute to the cost of a bailout, reminds me of the decision to let Lehman Brothers go under. Moral hazard is being avoided. The question is what that will cost.
In the case of Lehman, the cost turned out to be far greater than anyone expected. Suddenly the crisis was affecting money market funds. We learned to our discomfort just how interrelated the world’s markets were. I doubt anyone involved in making the decision thought about money market funds until they learned one had just blown up, thanks to the Lehman failure.
In the wake of all the bailouts that followed Lehman, something of a consensus has evolved — at least among non-central bankers — that those who fund bad banks should suffer. Bank bondholders are clearly at risk.
But Cyprus banks apparently don’t have many bonds. If someone is going to suffer, it will be the depositors. So the clever idea of a one-time tax on bank deposits was adopted. It did not help the cause of the depositors that a lot deposits seem to come from Russian moguls, not exactly a sympathetic group.
But Europe should have learned from Britain’s fiasco at Northern Rock that deposit insurance matters, particularly for relatively small accounts. If they can wipe out such insurance in Cyprus, why not Spain? Or Italy? Or even France?...MOREI have to stop Mr. Norris here to explain that the deposit insurance doesn't, in the narrow technical sense, come into play except that in the weltanschauung (oops, probably shouldn't use German for a while) of small depositors it made them think their deposits were inviolable.
Not.
It's in the larger (incorrectly interpreted) social contract that the feeling of betrayal the
And there Mr. Norris nails it.
But then he is, after all, the chief financial correspondent for the New York Times and he probably should nail it.
