Reply to Ledra Capital blog on a tax on deposit interest as an alternative bail-in strategy

My response to the Ledra Capital blog on revelations that Michalis Sarris wanted at tax on deposit interest to finance the recapitalisation of Cypriot banks - see also Cyprus Mail 14 April 2013 (with typos corrected).


Very interesting. Unfortunately the bailout/in was decided through a mess of politics rather than economic rationality finding a best solution for Cyprus. The particular solutions were arrived at through tensions between the the IMF/Germany and the Commission, tensions between Sarris and Anastasiades and the accumulation of impatience with the Cypriot government since initial contacts re a bailout in Nov 2011.

The comment, by an official close to Dijsselbloem, maybe summed up prevailing attitude,

“They [the Commission/IMF/ECB] had been farting around for months. …They would never, ever come together. We had to light a stick of dynamite and say: it’s burning.”

Even within your model the assumption of continued high interest rates on deposits is open to doubt. How were the banks going to continue to finance these?  Particularly if Laiki was insolvent?

I wonder also if the IMF/ECB/Germany would have bought your escrow deposit withdrawal penalty idea. This assumes that stealth withdrawals could have been completely closed off - even through the non-domestic branch networks in Greece, UK and subsidiaries in Russia.

I also find it puzzling that if Sarris was going for an interest tax this hasn't come out sooner.  Why only now?

Lastly on ECB supervision and retail deposits. What do we define as 'retail' deposits?  Can be argued that 'retail' is under €100,000 and is guaranteed. Over €100,000 has more emphasis on 'buyer beware'.  And if you have over 100k you divvy it up between accounts.  Its standard corporate treasury practice - even as an NGO it was written into our standing orders.

There is an issue about those ECB stress tests - take a look at the 9 April draft M of U where,

'the sensitivity of collateral valuations to property prices, and banks have used certain gaps in the supervisory framework to delay the recognition of loan losses, thus leading to significant under-provisioning'.

There is an issue about the relationship of the ECB and NCBs and CBC and political interference in these relationships - see Draghi's recent letter to the Cypriot government warning it from forcing Demetriades resignation - more stuff on the legal position of ECB and NCBs way down at the bottom of my very long page here

Best wishes

Fergus Murray

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