By now you have probably heard that depositors with over 100,000 euros in banks in Cyprus will be involuntarily contributing to bailing out the banks where they have deposited their funds. By taking funds from depositors the banks Cyprus will qualify for bailout funds from the EU.
Dutch Finance Minister Jeroen Dijsselbloem gave the market chest pains when he said, “If the bank can’t do it, then we’ll talk to the shareholders and bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders.” If you read between the lines what Dijsselbloem is saying that European taxpayers can’t afford to pay for bank bailouts on their own anymore.
The radical measures of using depositors’ money to bail out banks that have made poor investments is shocking to be sure. But there may be grains of sanity forced by inevitability in Europe’s move. How long can taxpayers in central and Eastern Europe support the profligate peripheral countries? Not much longer is the likely answer.
As Europe undergoes much needed austerity measures, there isn’t a lot of fat leftover to hand out to banks willy-nilly. Sure Greece was saved—twice—and Spain, Portugal and Ireland all got theirs. But a line had to be drawn somewhere, and apparently Cyprus was the perfect place. Stiffing depositors in a small country like Cyprus won’t do irreparable damage to the currency bloc’s economy, but the fear it instills in banks and depositors around the continent is a priceless form of enforcement.
If this is the new model for European bank insolvency resolutions, the currency bloc could be in for some rough waters ahead. With austerity measures dragging down the economies of many European nations, banks are under pressure and we could see more bailout requests in the future.