Sunday, March 17, 2013

Haircut

One of the rituals of entering the Marines, or almost any military service, is losing very nearly all one's hair. By that standard, depositors in Cypriot banks are getting just a light trim, but they aren't happy. The problem is that those Cypriot banks made a lot of bad loans - where have we heard this story before? Mostly to Greece. Another problem: there's a lot of money in Cypriot banks from overseas, attracted, I imagine, by the big interest they were getting on those crappy loans.

Let me rephrase the problem: the banks were undercapitalized and lent money not wisely but well...stupidly. The financial powers of the EU (AKA Angela Merkel) decided that the best thing to do would be to divide up the losses among the depositors. According to Matt Yglesias:

A tax of 9.9% on deposits over €100,000 and 6.75% on deposits below that level.

If this were happening in isolation, I would be inclined to say, "good plan." Who better to take the fall than the stockholders and depositors? It's really hard for me to have any sympathy for the international depositors, since they have had plenty of warning that Cyprus was on the financial ropes. I have more sympathy for the locals, but maybe next time they will insist that their government keep a tighter rein on the banks.

Of course this is not happening in isolation, so the real question now becomes what will happen in Spain. Widespread bank runs could kill the Euro dead.