[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.
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.