As expected, the Cypriot Parliament rejected the bailout package from the troika (i.e., the European Commission, the European Central Bank, and the International Monetary Fund) under the premise that the provision of a one-time taxation on ‘ordinary’ bank depositors was simply unacceptable.
Fair enough. It was outrageous to raid Mom and Pop’s savings account because of sovereign screw-ups. That said, the fact that it was even suggested and considered to the degree of a vote speaks to the dire straits that Cyprus is facing, as is the Euro Zone and the global economy, in general. People, we’re running out of options.
Debt is a curious thing; somebody has provided liquid capital and has the reasonable expectation of being given something in return for the initial hardship they undergo to provide the capital. On the flip side, someone needs a large infusion of cash and has a reasonable duty to pay for the privilege, bit by bit, as part of “servicing their debt”. In some places, that’s simply called paying your dues.
When it comes to sovereign debt, the authorization factor, unfortunately, gets hairy. In a country of free elections, purportedly you decide who will represent you and yours in these types of decisions to take on debt, to issue debt, et al. Outside of referendums, your hope is that your elected decision makers are considering your best interests, and in this space, at least, I’ll avoid from making the assertion that most political representatives do not. Let’s consider everyone, here, as an Honest Pete. It is easy to pick on the politicos when things go south; that’s the nature of short-term focused and a possibly financially illiterate electorate – no one looks further than the tip of their nose. However, conflicting forces can still be at work and not all decisions made are based on the free market. But, all debt is serviced on the free market and therein lies the rub.
For sovereigns should not be getting a free pass on their debt. This “managed haircut / agreement process” which somehow avoids triggering the default clauses found in most standard CDS contracts is bogus. If an individual citizen did that or a private company or a public corporation, they would be strung up by their toes, and rightfully so! It’s a hoodwink. But, as we’re also often reminded, sovereigns aren’t people or corporations; they serve a higher purpose. They serve and work on behalf of a citizenry and require special protections and/or treatments to adequately fulfill those duties.
Fair enough. So, here’s a question: if they can’t be treated the same should they be expected to act the same (in the context of contract-guided, free-market, fair behaviour expectations)?
If the answer to that is ‘No’ then raiding the bank accounts of individual ‘ordinary’ depositors[1] doesn’t seem so outrageous after all, does it? All for the higher purpose of preserving the Cypriot banking system, the Euro Zone, and global sovereign rights, yes?
Consider that. [2]
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[1] I’ve deliberately not addressed directly the > €100,000 accounts and the “Russian oligarch” pool – you pick your battles and that one is bigger than me today.
[2] You may also want to consider the wild idea of private companies bailing out sovereigns. Read this – must love Russian monopolies.
Additional Reading
Resistance in Cyprus Grows to Europe’s Bailout Plan, NY Times, 18 March 2013
After Deal Is Rejected, Cyprus Scrambles to Find Funds, NY Times, 20 March 2013
Rejection of Deposit Tax Kills Bailout for Cyprus, NY Times, 20 March 2013
Cassandra John 