The Cyprus bank run: Is the rest of Europe next?

The decision to place a levy on insured accounts, in particular, seems extremely foolish. Note that it may have been necessary to prevent a run on the foreign accounts, which by some reports constitute about a third of total deposits. But if violating the deposit guarantees was necessary to implement your “tax the Russians to pay for the bank bailout plan”, that should have been a sign that the plan was a bad idea.

Deposit insurance is the one way we know to stop a bank run. Oh, the government can say that this was a one-time thing, but once you’ve broken your promise once, what’s to stop you from doing it again? It’s bad enough to slam middle-class savers in order to put a smaller levy on Russian oligarchs, but it’s insane to do so when you’re actually making it less likely that your bank bail-in will succeed. And at this point, the whole scheme is looking extremely shaky.

It’s foolish for Europe, too. If Cyprus had done this on its own, the country would be in trouble, but the rest of the world would just emit a bemused sigh and move on. Now, however, this plan has the imprimatur of the EU stamped on it–and so people are going to be looking hard at other European banking systems. Which other nations’ depositors might have to take a similar haircut in the future?

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