Dialogue with the Alter Ego about the EU’s one-off depositor tax lie in Cyprus
Question by Alter Ego of Noah denkt™ (AE): In our first Cyprus-Dialogue (“Bad Boy Germany, yet again!”) published on March 21, Noah denkt™ reassured us that the EU’s “proclamation of Cyprus being an exception” as far as levying a bank rescue tax on savings accounts “is pretty credible”. In fact, you warned us to “take it easy with our criticism of the EU” on this. Now, it turns out that the EU and Germany, in particular, are actually pushing for Cyprus being the “template” for future bank rescues in the EU. (See: “Berlin presiona para accelerar las quita en futures crisis bancarias, in: El País of March 27 and “Cyprus rescue signals new line on bailouts”, in Financial Times of March 25). What do you say now?
Answer by Noah denkt™ (Nd): We are outraged by this. First, because we feel that we have been recklessly lied to. And second, because it is completely mistaken to use the Cyprus savings account tax as a blueprint for future bank rescues.
AE: Why do you think the European Union is making this, in your words, outrageous mistake?
Nd: Because they have moved themselves into an untenable position as far back as 2008 by subscribing to the common wisdom that it was wrong to let Lehman Bros go bust and that every bank should instead be rescued in order to avoid a systemic risk for the entire financial system.
AE: But the Lehman Bros – bankruptcy did in deed show how close the world got to an entire system break-down. After all, it did cost the tax payer a lot of money to avoid financial mayhem back in 2008. Is it, hence, not understandable that European governments do not want to run a similar risk again?
Nd: Well, first of all, the Bush bank bail-out money has been repaid with an interest to the US tax payer. So, the US government didn’t make a loss on that. And secondly, it is simply wrong to believe that you can manage the danger of moral hazard adequately without taking the risk of systematic failure to its very limit. In other words, you have to find a balance between the moral hazard of providing bail-outs on one side and the systematic risk of not providing one on the other side. If you blindly go with the view that any kind of systematic risk whatsoever needs to be avoided as the European Union does you will eventually end up in a very difficult situation. In fact, it seems to us, as if European politicians are by now more concerned with avoiding personal hardship for themselves rather than accepting the excruciating responsibility which comes with having to stomach the social stress that a balanced risk management generates.
AE: But what we are seeing now in the EU is not a moral hazard problem in the markets, is it?
Nd: Well, in a way, it is. It is the moral hazard that comes with defending an overly risk averse mentality. And we are talking here about a mentality that is the natural consequence of Europe’s feel-good-capitalism which in turn has been generated by an overly patronizing social market economy. In fact, this desire to have a fatherly protection against each and ever possible scare that might be out there has reached such perverse levels in Europe that by now it is starting to unearth the foundations of capitalism by destroying the trust that depositors can have into the integrity of their savings accounts.
AE: So what do you suggest instead?
Nd: Well, the EU has to find the courage to let some banks go bust and rescue only those institutions that really are too big to fail. That would considerably lower the tax payers’ rescue burden and it would make such measures as levying a tax on saving accounts unnecessary. In this respect, we have always maintained that it was a mistake to bail out Germany’s IKB Bank. To this day, we are not sure whether Northern Rock really needed to be saved. We are doubtful that all Irish banks and Spanish Cajas de Ahorro needed to be rescued. And we certainly are not convinced that the Cypriot state needed to help their local banks. Just witness the Icelandic case where banks weren’t being bailed-out. And Iceland has recovered wonderfully from its earlier state of emergency.
AE: Is it likely though that the EU will modify its stance on bank bail-outs along the lines you have delineated here?
Nd: Probably not.
AE: So it all looks pretty bleak for the future of Europe’s capitalism.
Nd: In a way, yes.