The botched scheme to bail out the Cypriot banks is not so much a template for future debt crises as a hypocritical fudge
At one level the eurozone debt crisis has always been about how losses will be divided. It was good news of a sort, then, that Jeroen Dijsselbloem, the new head of the eurogroup, declared this week that the game would be played in future by easy-to-understand rules. There is now a batting order, announced Dijsselbloem: shareholders in insolvent banks in countries in need of financial rescue will get wiped out first; bondholders will follow; and then uninsured depositors will have to chip in.
Naturally, the eurozone powerhouses arrived at this position in Cyprus in shambolic fashion. Version A, rejected by the Cypriot parliament, would have imposed losses on small depositors, in breach of past promises that sums of up to €100,000 would be sacrosanct. But the final version definitely resembled a textbook formula: small depositors were protected and the financial pain was apportioned according to where a creditor stood in the traditional pecking order of capital.
So tough luck if you are a Cypriot small business, a university or a citizen with a large deposit at Laiki or Bank of Cyprus. You have just been hit by a whacking great levy on your cash. Apparently you should have concentrated less on your day job and spent more time monitoring the health and capital position of your bank.
But does anybody really believe the Dijsselbloem philosophy will be adopted consistently? Of course not. Within a couple of hours an official statement said Cyprus was not a template for anything. The country was a "one-off", said German finance minister Wolfgang Shäuble.
What's the true position? It seems the new approach of hitting bondholders and depositors in order to protect taxpayers is really an aspiration. It applies except when it doesn't. More fudge, in other words.
Viewed from Cyprus and many other countries, it will taste like fudge with added hypocrisy. The euro banking system couldn't cope with the collapse of a large bank in, say, Spain, in which losses were imposed on bondholders and uninsured depositors. And, as solvency often lies in the eye of the beholder (meaning the European Central Bank), there will always be scope to contain the pain while labelling the operation a liquidity programme.
Whacking depositors in Cyprus, and imposing capital controls, has major consequences. Nobody has clarified why Cyprus is a one-off. Was it the presence of unsavoury Russians? Or was it that rescuing the banks would have made the country's debt burden unmanageable, even under the usual heroic assumptions about growth and recovery? Nobody knows, but the eurozone leaders have provoked alarm across the continent. Luxembourg, with a bigger banking system than Cyprus, is in a flap over Dijsselbloem's remarks. Slovenia is suddenly top of the banking worry-list. It is small enough, like Cyprus, to be considered a safe case for bailing in bondholders and depositors if necessary; on the other hand, there's no Russian angle. Would Slovenia receive a Cypriot solution or not? Then there's the towering question of what would happen in Italy if Silvio Berlusconi had a role in government.
One fact depositors know for certain is that the euro authorities are prepared to impose capital controls. It is a significant moment; and the longer controls remain in place, the more confidence could be undermined elsewhere.
A year ago, before Mario Draghi at the ECB doused the flames in the sovereign bond market, it was said that no fund manager would ever get fired for buying German bunds. Will the same logic now apply among corporate treasurers in Portugal, Spain, Italy and elsewhere? Will they calculate that nobody will ever get fired for switching deposits to a German bank? If so, the eurozone financial system will become even more unbalanced.
And it would be rational for businesses and wealthy individuals to go German. Whatever it says in the textbooks, pushing depositors into the same pecking order as shareholders and bondholders, albeit in third place, is radical stuff. Investors are seeking profit. Most depositors are seeking a safe home and it's the bank, through the workings of fractional reserve banking, that is trying to make money. But if this is the new regime in euroland – as suddenly advertised in Cyprus – large depositors need to wake up.
A near-certainty is that another banking crisis will arrive sooner or later. The handling is now critical. The eurozone has tried making taxpayers, as in Ireland, pay for bail-outs. If the new idea is to make investors and then depositors carry the can, the market will demand to know how far politicians are prepared to go. At what point would leaders perform a U-turn on their U-turn?
Almost three years after the first Greek bail-out, the euro's route to stability and growth looks as uncertain as ever. Apart from Ireland, the periphery countries are hardly any closer to making their economies more competitive and unemployment across the 17 countries stands at almost 12%. If this was a company, the owners would be demanding a break-up just to make the problem easier to manage.
How many more crises can the euro survive? Never underestimate the political will to keep the project alive, they say. Even so, two more small crises or one big one feels about the limit.
Banking reform: a proposition
Let's have more competition in UK banking. An excellent idea, and we shouldn't grumble about the regulators' effort to give new entrants a leg-up by allowing them to operate with lower levels of capital. It's just that this reform doesn't feel as if it will shift the dial very far. Lloyds and Royal Bank of Scotland hardly generated a stampede of interest when, under EU orders, they each put a few hundred branches up for sale.
If there's to be a revolution in banking it will probably come from left-field and via new technology and business models. Peer-to-peer lending over the internet is the place to look. The model is gloriously simple: make the middleman thinner and allow both lender and borrower to enjoy better rates.
The obvious worry is the rate of default. But credit officers at the likes of Zopa and RateSetter can use the same credit-checking agencies as the banks. In practice, default rates have been low – 0.37%, reports RateSetter, which operates a central provision fund to cover shortfalls. And, at the moment, the firm is spoilt for choice of borrower: it did £6m in loans this month out of applications to borrow £75m. A car purchase is the most common reason to borrow.
The sector is still tiny. Zopa has lent £288m in total, and RateSetter £63m. But the model is working smoothly. Note, too, that Jacob Rothschild, one of the UK's most successful investors, bought a stake in Zopa last year. That's a reasonable indication that the peer-to-peer pioneers have started something significant.
Burying good news?
Companies can publish their annual reports, complete with disclosures on pay, whenever they wish. So what sort of two-bit outfit slips out its report at 6.15pm on the day before Good Friday as if it's got something it would rather nobody noticed? It's UK Asset Resolution. Never heard of 'em? They're the crew running down the mortgage books of the "bad" parts of nationalised Northern Rock and Bradford & Bingley.
The work may be unexciting, but it does indeed pay well. Chief executive Richard Banks earned £643,000, up 7.7% on a year ago. OK, that won't win many bragging rights in banker-land, but it's not bad for a publicly owned body that says it is trying to apply restraint on remuneration.
 |
| READ THE ORIGINAL POST AT www.guardian.co.uk |