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Sowing fear among savers

To make depositors pay for bank crises, as a rule, is an error contrary to the euro project

If the format of the Cypriot bailout, featuring a substantial "haircut" on deposits of over 100,000 euros, is to become a general template for future banking crises in the European Union, it is a matter of grave concern for the future of European monetary union. That this was in the plans of the EU leaders was first blurted out by the fumbling and incompetent president of the Eurogroup, Jeroen Dijsselbloem, a person who does not hesitate to infringe the EU directives that he is supposed to implement, and whose continuance in the post is a danger to the euro zone as a result.

But the Commission itself confirmed that the principle of targeting deposits did figure in their draft plans for the bank restructuring fund — a key body, together with that of supervision, for the future banking union.

This proposal, if formulated as a general rule, is a mistake. It is natural that in the case of a bank failure its shareholders lose all their money, and next the bondholders. But to include, just like that, the depositors in the sequence of responsible asset-holders has no legal grounds, because a deposit differs essentially from an investment. This is why it can be subject to risk of loss only in very special cases, such as that of Cyprus, where the quantity of the deposits, the rates of interest they received, and other circumstances, lead to them also being classified as risky assets.

There is also a danger inherent in its economic impact, because the expropriation of deposits, or the mere contemplation of such a move, is likely to sow panic and financial turbulence in the euro zone. Moreover, a norm of this nature may constitute a violation of the EU's due neutrality and a distortion of the market, diverting depositors to certain types of banks in certain countries.

True, the cost of banking crises should fall first upon their responsible executives and owners, before hitting the taxpayer. But to apply the model of the Cypriot crisis to other cases — dipping into the savings at first of all depositors, even the most modest, and then backing down and hitting only the wealthiest — is not only imprudent, but also immoral. And to take this path as a shortcut, to dilute the direct recapitalization of banks, the potential of the European rescue fund, and the ambition of the embryonic banking union, minimizing the unavoidable mutualizing of responsibilities, would be an unforgivable backward step.

Almost like other companies, banks have to be liable to failure, followed by a carving up of their assets or a recapitalization, as may be advisable in each case, and without predetermination. Otherwise, the incentive to irregular or foolish management (the "moral hazard") soars to unacceptable levels. Indeed, many banks close down every year in many parts of the world, notoriously in the United States. But, unlike the loose-tongued president of the Eurogroup, no one thinks of scaring the depositors and the markets. The Dutch government did not do this when ING collapsed, nor did the German government when it injected 18.2 billion euros of the taxpayers' money to bail out the giant Commerzbank.

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