Cyprus

Plenty of good commentary out there. See here and here especially. 

Cyprus’ EU partners are saying: “Not me — we didn’t insist on a haircut for small depositors.” 

So Nicosia wanted to protect its position as a banking centre. This is less permissible in view of the fact that it has simultaneously agreed to shrink its banking sector’s share of GDP. 

This is a “bail-in” to the extent that creditors are being directly drawn into the rescue. Depositors are among a bank’s creditors. You are lending money to the bank when you put funds on deposit. However, I’ve always understood the PSI/bail-in to imply financial market creditors — i.e. bondholders. Trouble is, the Cypriot banks don’t seem to have many of them. 

Should the sovereign’s creditors have been bailed in? 

After-effects:

  • As I tweeted on Saturday, I’m looking for a big presence from the ECB (or from the national central banks in the form of ELA). It will simply have to step in to ensure liquidity if people take fright across the peripheral eurozone. 
  • Say au revoir to that wonderful GBP depreciation. Merv might not have liked it, but it was truly a great thing for this (UK) economy. That’s over now. Where do you think fleeing EZ deposits will go?

More later, with time.
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