After all previous 'endgames' for the euro, this one looks like the real thing
'This sucker could go down." So said George W Bush back in 2008, at the height of the global financial storm. The then US president was referring to the massive risks facing the world's largest economy following the Lehman collapse. Could Dubya's prosaic words now be applied to the euro? Will Cyprus quit the single currency?
The 'bail-in' deal imposed on this tiny Mediterranean nation last week is better than the one mooted less than a fortnight ago. The lunacy of penalising insured deposits, those under €100,000, has been avoided. While the atmosphere in Cyprus is tense, it is also obviously a relief that, since the banks reopened their doors last Thursday, after almost a fortnight shut, there's been no serious civil unrest.
At Laiki Bank, the island's second-largest, deposits above €100,000 are being slashed by up to 80pc. Similarly, uninsured deposits at Bank of Cyprus, the biggest bank in the country, will suffer 40pc losses. All savers, meanwhile, are subject to stringent controls on withdrawals, including a €5,000 monthly limit. Cypriots travelling abroad can take just €1,000 with them and import payments must be approved by the central bank.
Cyprus marks the first eurozone banking crisis that is being "resolved" without a seemingly limitless reliance on taxpayers' money from other member states. A distinction is being made between solvent and insolvent banks, with bondholders at the latter taking a very big hit. That is how it should be.
Had insured savers also been stung, those with deposits below €100,000, that would have breached a eurozone guarantee extended just a few years ago. It would also have spread panic and even political extremism across Europe, as tens of millions of households took fright at the security of their savings.
Having said that, I still have a very big problem with the large depositor write-downs. Depositors are not bondholders – who knew their money was at risk and reaped a commercial yield on their investment. On the contrary, depositors put their money in a bank, at a lower rate of return, precisely to keep it safe.
While the Brussels PR machine endlessly talks of "Russian oligarchs", the reality is that €100,000 is not a huge amount of money.
Across Cyprus this Easter, hundreds of family-owned businesses are trying to come to terms with what they see as the theft of their working capital. Numerous charities, universities and other educational endowments have also been whacked.
As I said, depositors are not investors. There is an absolutely crucial distinction between them, or, at least, in a modern society, there should be. Moving on any depositors, large or small, seriously undermines the financial and legal fabric of capitalism itself.
The only reason there hasn't been a massive bank-run in Cyprus in recent days, of course, is the draconian capital controls applying to all banks. While these are supposed to expire at the end of this week, there is absolutely no way this will happen. As soon as controls are lifted, such money as remains in Cyprus would take immediate flight. As long as Cyprus remains in the euro, such controls are almost certain to stay in place.
But are they compatible with single-currency membership? How long will it be before euros in Cyprus are worth less than those that can be spent across the other 16 member states? And are capital controls even legal? Articles 63 and 65 of the European Union treaties say such controls are justified "only on grounds of policy or public security" and should "not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments".
How long, then, before some of the very large international business interests caught up in this Cypriot banking chaos get together to launch the mother of all legal disputes?
For any nation, leaving the euro would be a chaotic affair – involving forced deposit redenomination, bank-runs, collapsing "new" currencies, soaring inflation and a whole world of legal disputes. But social and political pressures could yet bring Cyprus to the point where this seems a better option than staying in. Or, the markets, of course, could "impose" a Cypriot exit.
"We have no intention of leaving the euro," said President Nicos Anastasiades this weekend. "The situation, despite the tragedy of it all, is contained." When it comes to assessing systemic dangers,
Some may prefer the banal yet far more accurate language employed by the former President Bush. (© Daily Telegraph, London)
Liam Halligan is chief economist at Prosperity Capital Management