The Cyprus Bailout, Deposit Guarantees, and the Single Market (Updated)

lindsethProf. Peter Lindseth

 [This is a slightly updated and modified version of a post that appeared on europaeus|law over the weekend.  It is cross-posted here with permission.]

We’re all monitoring the intense fallout from the announcement by the Eurogroup that the Cyprus bailout will be conditioned on an “upfront one-off stability levy” on deposits in Cypriot banks.  The levy – 9.9% on bank deposits exceeding 100,000 euros and 6.7% on anything below that – will take place on Tuesday after a bank holiday on Monday.

There will no doubt be much more to be said about this in the coming days and weeks, but we note the general expectation that the levy, as structured, will hit small depositors in Cyprus banks especially hard.  Moreover, we want to point out the potential impact that the bailout conditions will have on the single market, notably harmonized deposit guarantee schemes.  As Open Europe asked on its blog:

Does this move break EU rules on capital controls and/or deposit guarantees? As noted above, it seems that depositors will be blocked from withdrawing their funds from banks. For other EU depositors this surely amounts to a form of capital control – strictly forbidden under the EU Treaty. Furthermore, as Sharon Bowles MEP has been tweeting, this move makes a mockery of the current EU rules on deposit guarantees below €100,000. The Eurozone may protest that the bank shares given in exchange are of the same value, but this is a very thin argument. Either of these issues could be challenged at the European Court of Justice.”

Bowles, a Lib-Dem MEP and chair of the EP’s Economic and Monetary Affairs Committee, has now issued a press release entitled “The Cyprus bailout deal is a disaster for EU rules andSingle Market principles“.  She writes:

“This grabbing of ordinary depositors’ money is billed as a tax, so as to try and circumvent the EU’s deposit guarantee laws. It robs smaller investors of the protection they were promised. If this were a bank, they would be in court for mis-selling.

“The lesson here is that the EU’s Single Market rules will be flouted when the Eurozone, ECB and IMF says so. At a time when many are greatly concerned that the creation of the ‘Banking Union’, giving the ECB unprecedented power, will demote the priorities of the Single Market, we see it here in action.

“Deposit guarantees were brought in at a maximum harmonising level so that citizens across the EU would not have incentive to move funds from country to country. That has been blown apart.

“What else will be blown apart when convenient? All the capital requirements we have slaved over, what about the new recovery and resolution rules? What does this mean for confidence in cross-border banking and resolution and preventing the fragmentation of the banking sector?

“When the dust has settled on this deal, which I hope it never does, we will see that the Single Market has been sold down the river for a shoddy price. All the worse as the consequences for Cyprus of the Greek bond haircuts were obvious.”

On FT Alphaville, Joseph Cotterill (admitedly very half-heartedly) tried to play devil’s advocate on this point, noting:

“It’s not as if Cyprus is going out to people and saying sorry, we can’t honour what you’re owed under the depositor guarantee scheme. The levy is parallel to the government’s obligations there. Securing the official loans on Friday night if anything made the looming risks of holding a deposit in a Cypriot bank fade away. These were the counter-party risk, and also redenomination risk, assuming the alternative to a bailout was Cyprus leaving the euro.”

There are, of course, numerous other legal issues to consider, as Cotterill points out, quoting a prescient piece last year by Lee Buchheit, Mitu Gulati and Ignacio Tirado. But for now let’s focus on the issue perhaps most on the minds of specialists in European law: the impact of the Eurozone crisis on the single market, the cornerstone of European legal integration for decades.  We’ll try to follow up with more updates on this point as events develop, but we invite network members and other readers to chime in as well.

Update1:  Since posting this piece on europaeus|law on Saturday, I noted a piece by Eamonn Fingleton in Forbes, which makes much the same point as the various critiques above. Fingleton writes that the deposit levy has

weakened – perhaps catastrophically – the principal pillar sustaining modern banking. This pillar is deposit insurance. Ordinary savers who had received a solemn assurance that deposits up to 100,000 euros were safe are now being asked to take a haircut. This raises questions about deposit insurance throughout the EU and invites runs on banks not only in the most “financially-challenged” nations such as Greece and Spain but even in Italy and France.

But what also caught my eye was this passage in Fingleton’s critique:

It is time for plain words. The ultimate source of Europe’s financial malaise is Germany. The German financial establishment was complicit from the beginning in the inflating of some of the bubbles in the afflicted nations. Now it is not only disowning its role in causation but, by forcing austerity on national governments and refusing to allow more than token inflation of the euro, it is turning the knife in those nations’ wounds.

This post echoes a point I’ve been stressing on this blog for more than half a year, initially here, and more recently here.  As I wrote last December,

The problem is that the periphery is now bearing all the economic dislocation resulting from [the EMU’s originally] flawed design, while Germany gets the benefit of an undervalued currency feeding its export economy and trade surpluses, thus keeping its unemployment rate low while the rate in the periphery skyrockets.  This is the ‘economic interdependence’ that political choice in favor of the EMU has wrought.  It has worked overwhelmingly in Germany’s favor.  Hence the crucial importance of engaging Germany on moral grounds. Germany must recognize unfair distribution of dislocations as an aspect of its ‘democratic’ responsibility for the Eurozone crisis.

As the Eurozone crisis persists and intensifies, the terrain of shared fault will, I believe, become an essential battleground in the political-cultural struggle to define a workable solution going forward.  The controversy over the “upfront one-off stability levy” in the Cyprus bailout is merely one more step in that direction.

Update2: Fingleton’s post links to this piece by Tim Worstall, that provide further details on the Cyprus deposit insurance scheme and examines the implications of the levy for stability of the EU banking system more generally.  Worstall writes:

Think through why we have deposit insurance? Banks, simply because of fractional reserve lending, are vulnerable to bank runs….

But if word gets around that, whatever people have actually said, deposit insurance isn’t inviolable, that if there are serious problems then government will not live up to their promises (or perhaps, that the EU will not allow them to do so) then what use is the insurance in stopping bank runs? Why won’t all the money flee to Germany thus creating that very bank run everyone is trying to avoid?

Perhaps I am over-emphasising this. But it looks like an extremely dangerous decision for the future to me. Even when Iceland and all its banks went bankrupt the Icelandic government did keep its promises under the deposit insurance scheme that it had. And breaching that principle just seems to be obviating the whole point of having deposit insurance in the first place.


8 thoughts on “The Cyprus Bailout, Deposit Guarantees, and the Single Market (Updated)

  1. Update3: The political challenges of getting the levy through the Cypriot parliament are substantial: ekathimerini reports that passage is by no means assured ( and that the bank holiday has been extended until Tuesday to buy more time ( To make the deal more palatable, Nicos Anastasiades, the President of Cyprus, has promised depositors bonds linked to natural gas earnings rather than bank shares ( Peter Spiegel at FT is also reporting that the Cypriot government is enlisting the aid of the European Commission to renegotiate the terms of the deal to shift more of the burden on to depositors in excess of 100,000 euros ( In that vein, Reuters is reporting: “The Cypriot government was on Sunday discussing with lenders the possibility of changing the levy to 3.0 percent for deposits below 100,000 euros, and to 12.5 percent for above that sum” (

  2. Update4: Edward Harrison at Credit Writedowns has an excellent piece up, well worth the read, entitled “Some thoughts on German politics and the saver’s tax in Cyprus” ( It provides a very succinct historical overview of the reasons for German “bailout fatigue” and the increasingly harsh conditions that Berlin is demanding in order to support continued bailouts. This helps to contextualize Peter Spiegel’s reporting on the Eurogroup negotiations, in which, as he puts it, the fate of Cyprus depositors was “sealed in Berlin” (

  3. Sorry, this is really not convincing:

    1. The causes for the problem in Cyprus are a) its overblown banking sector and b) its overexposure to Greece. Therefore, it is really absurd to blame Germany for the malaise in connection with Cyprus.

    2. The problem in the periphery is not “austerity forced on the national governments by the Germans” and no inflation. As if the crisis would go away with more “deficit spending” and higher inflation! The problem is that most governments in the periphery deny reality and have not even properly started addressing the main cause of the malaise: ineffective and overblown public administrations and public companies, indebted social security system, inflexible labour markets, poor education systems, ineffective tax systems. If more public spending and “less austerity” would really lead to sustainable growth and jobs why are those countries with the highest debt levels like Greece not better off?

    3. The EMU has not worked “overwhelmingly in Germany’s favor”. The growth in Germany since the start of the euro area has been 0.1% above average. Only recently, Germany has done some catching up. One reason is, that Germany has gone through some unpleasant reforms as part of “Agenda 2010”. However, if you also add all German guarantees in the form of direct aid to Greece, EFSF, EFSM, IMF, ESM and Target 2 into the mix, the picture does not look so good anymore.

    4. I agree that it breaches the principle of the single market not protect savers below 100 000 EUR. And it also sets a dangerous precedent for the other periphery countries.

  4. Germany is now apparently trying to deflect blame for the mess over the Cyprus mess onto the Cypriot government, the European Commission, and the ECB. ekathirmerini quotes German Finance Minister Wolfgang Schaeuble:

    “It was the position of the German government and the International Monetary Fund that we must get a considerable part of the funds that are necessary for restructuring the banks from the banks owners and creditors – that means the investors. But we would obviously have respected the deposit guarantee for accounts up to 100,000,» he said. «But those who did not want a bail-in were the Cypriot government, also the European Commission and the ECB, they decided on this solution and they now must explain this to the Cypriot people.”

  5. Tim, apologies — I didn’t see your comment; otherwise I would have responded sooner, and I would not have duplicated your comment on the German attempt to deflect blame for the precise distribution of the bank levy, which it claims not to have dictated (plausibly).

    But none of this takes away from the essential point, which your own comment establishes quite nicely: No reasonable government should have participated in the establishment of an EMU among disparate countries plagued by “ineffective and overblown public administrations and public companies, indebted social security system, inflexible labour markets, poor education systems, ineffective tax systems.” The problem with the EMU was in its actual design, not its implementation — it was a disaster waiting to happen, and Germany cannot escape its share of responsibility for that, regardless of what one might say about the profligate periphery. As I wrote in an earlier exchange on this blog (

    “In entering into the treaties, Germany told itself that the ban on monetary financing or strictures against fiscal indiscipline, if complied with, would make the EMU work. But this ignored a myriad of other risks associated with EMU, inter alia the differences in competitiveness, unit labor costs, and the resulting balance of payments problems, which proved to be much greater threats to the stability of the project. Germany took no precautions against those risks (which frankly might have led a “reasonable government” not to enter the EMU in the first place). In that respect, Germany and all the other EMU participating states acted “negligently” by breaching the fundamental duty of reasonable precaution in the structuring of the monetary union as a whole.”

    It’s for this reason that the obligations of the “core” should be understood as flowing from “fault, not solidarity,” as I titled an earlier blog post ( As it stands today, the periphery is bearing all the dislocations resulting from the EMU’s flawed design, and the Cypsus bank levy is merely the most recent evidence. -Peter

  6. Munchau adds this on the question of legality: “legally, Cyprus is not defaulting or imposing losses on depositors. The country is levying a tax of 6.75 per cent on deposits of up to €100,000, and a tax of 9.9 per cent above that threshold. Legally, this is a wealth tax. Economically, it is a haircut” ( The issue is whether the ECJ, if it ever hears the matter, will be focus on legal form or economic substance. My guess, given its track record on refusing to constrain supranational power, would be the former, although it could surprise us. The sole purpose of this “wealth tax” is to finance, in effect, a bank recapitalization. The legal form is irrelevant; the economic substance predominates: the purpose of the levy is to impose losses on deposits below 100,000 euros, in contravention of the deposit guarantee scheme.

  7. This is essential reading, from Frances Coppola, on her Coppola Comment blog (

    “What is harsh and unfair is that depositors have been led to believe that small deposits were guaranteed, when the supposed “guarantee” is not worth the paper it is written on. In the Eurozone, deposit insurance is only as good as the ability of the sovereign to honour it. If the sovereign cannot honour it, it is worthless. And that is the situation not only in Cyprus, but also in Greece, Portugal, Ireland and possibly Spain. None of these sovereigns could borrow, print or otherwise raise the money to meet claims under the EU’s deposit insurance scheme.

    “It is time that depositors were told the truth. The lack of a common deposit insurance scheme in the Eurozone means that deposit insurance is a luxury available only to those countries that can afford it – which are also the countries that least need it. Everywhere else, it is a sham. “

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s