The Cyprus deal should mark a turning point in the aftermath of the 2008-9 financial crash. Until now bail-outs of Eurozone banks have been almost entirely at taxpayers’ expense. The same applied to Brown’s bailouts of UK banks which cost taxpayers £67bn plus a further several hundred billions in loan guarantees, liquidity support and asset protection schemes.
All of these let investors off the hook, though the latest Greek bail-out involved a ‘haircut’ (a levy on investor assets) which may turn out as high as 40-50%. Earlier this week however a new precedent was set when Jeroen Dijsselbloem, the Dutch (Labour) Finance Minister and head of the Eurogroup of finance ministers, finally resolved the Cyprus crisis by requiring investors to shoulder the burden, and announcing that this was not a one-off since it would set the tone for future Eurozone bank rescues. This is an approach that the UK government should now take to heart, indeed should have espoused long before.
The Dijsselbloem rule will certainly have major effects on the Eurozone. The new policy replaces that set some 9 months ago that the European Stability Mechanism, the Eurozone’s $500bn rescue fund, would be the instrument to recapitalise failing banks directly (i.e. not via sovereign governments).
It has already been recognised that this risks capital flight by investors in other struggling countries, and most seriously in the case of Spain and Italy, and the fall in bank shares in this last week reflects these concerns. But not to take the Dijsselbloem line exposes markets to moral hazard on the grand scale, i.e. that governments can always be relied on to counter the danger of banking collapse whatever the cost to taxpayers. Abandonment of that principle is the right policy, and should have been adopted long before.
Though Britain is not a member, the change in Eurozone policy is highly relevant to the UK. It is now being proposed by Mervyn King, in his last 3 months as BoE governor, that UK banks should be further recapitalised to the tune of £25bn. This is in response to the central bank’s Financial Policy Committee finding that bank losses over 3 years on high-risk loans could be £30bn larger than the provisions made for this, bank mis-selling could cost an additional £10bn, and yet another £12bn was needed in case the rules were changed on the banks’ risk-weighted assets.
Against these crass bank failures it would be outrageous to bail out the banks yet again for two strong reasons. It would jeopardise bank lending to industry, already at a very low or even negative level, and it would expose the banks to an even higher level of moral hazard. Far better, as in the Cyprus case, to break up those banks that have already imposed gargantuan costs on the British economy and restructure the financial sector in a manner that genuinely serves the long-term UK national interest.
Whilst it is excellent to see a politician opposing the bank bail out I don’t think it is a good idea to support the robbing of savers (not investors) to bail out speculators as happened in Cyprus as this is actually supporting the bail out not to mention completely wrong. Mervyn King is proposing negative interest rates to rob savers here to `recapitalise’ the banks i.e. pay out their billionaire and corporate creditors. That should be opposed full stop just as we oppose austerity and QE which rob the poor, sick, young and old to the same bank bailing end.
We need to move the staff, estates and savings from the bankrupts to a new People’s Bank so those deposits can be lent at base rate to small business and used to facilitate social investment not wasted in the black hole of the bankrupt bail out.