Could bank-runs collapse euro?

Could a failed bank robbery in Cyprus cause the collapse of the euro?

Could a failed bank robbery in Cyprus cause the collapse of the euro? It’s hard to imagine how anything that happens in Cyprus, with less than one million people, could bring down the common currency shared by 300 million Europeans, but there are few human behaviours as infectious as a run on the banks.

Strictly speaking, the Greek-Cypriots are not having a bank run, because their banks have all been closed since last Saturday. But there would certainly be a nationwide bank run if they reopened the banks without strict limits on cash withdrawals and transfers overseas.

A financial disaster in remote Cyprus cannot directly affect the fate of the rest of the “eurozone” but any suspicion that the bailout of a European Union country might involve the actual confiscation of money in people’s bank accounts is financial and political dynamite. The terms of the Cyprus bailout have just confirmed that suspicion.

The banks in Cyprus had certainly got too big for their boots. They had grown fat on the deposits of Russians, many of whom were laundering illegal funds. And they had lent out far too much money, especially to Greek banks and companies: their loans amounted to eight times the entire country’s national income.

Everything seemed all right until Greece’s economy crashed and needed a bailout. Last year, foreign investors holding Greek bonds were forced to take a “haircut”: they had to agree to a 70-per-cent cut in the value of their holdings. That plunged the Greek-Cypriot banks into a nearly terminal crisis.

So now it was Cyprus’s turn for a 17 billion euro bailout — but this time it was not the bondholders who got a “haircut” — it was the depositors.

Cyprus was ordered to raise 5.8 billion euros of the bailout money itself. It was to do it by confiscating 6.75 per cent of the money in the savings accounts of everyone with less than 100,000 euros in their account, and 9.9 per cent of the money in all larger accounts. In most people’s eyes, that is just straight theft. Worse yet, people in other EU countries realized the awful truth: EU bailouts can cause bank runs.

How did the geniuses who designed this bailout get it so wrong? The real culprit appears to be Wolfgang Schaeuble, the German finance minister, who insisted on raiding bank accounts in Cyprus. And the rest of the geniuses went along with it.

So Greek-Cypriots took to the streets in protest. Newly elected President Nicos Anastasiades urged parliament to back the bailout, but in the vote on Tuesday not a single MP supported it.

The whole deal is dead and Schaeuble is now warning that the banks in Cyprus may never reopen if it is not resurrected in some form. But the real crisis may be happening in other EU countries that are vulnerable to a bailout, including Italy and Spain.

The geniuses swore that the Cyprus bank heist was a one-off, and that no such measure would ever be imposed on another EU country. Nobody in Spain or Italy believes them, of course, and the wealthy will already be moving their euros to accounts in other countries. The less rich will just be taking their money out of the bank and hiding it under the mattress.

Could all this end up with bank runs that bring down the euro itself? It’s still unlikely, but it’s certainly not impossible.

Gwynne Dyer is an independent journalist whose articles are published in 45 countries.