Eurozone officials play with people’s deposits and minds

Jean-Claude Juncker, Prime Minister; Minister of State; Minister of Finance of Luxembourg, José Manuel Barroso, President of the EC, Herman van Rompuy, President of the European Council and Christine Lagarde, Managing Director of the International Monetary Fund (IMF) (from left to right). (EC Audiovisual Services).

It seems that, some only theoretically serious decision-making political bodies, like the Eurogroup, collectively believe they can play with a haircut on bank deposits, as if it was a trivial matter. Unfortunately there is no other explanation. Institutions like the European Commission, the European Central Bank, the International Monetary Fund and of course the German government who dictate Eurogroup’s decisions, don’t respect the people nor the European principles of reason and honesty. All those authoritative bodies over this past long weekend played with the life savings of Cypriots, initially telling them that they have to suffer a haircut of 6.75% on their bank deposits up to €100,000 and then reducing the charge to anything close to zero.

As the European Sting established yesterday, by publishing a European Commission’s statement of 12 July 2010, all deposits of up to €100,000 in all Eurozone banks, are guaranteed by the European authorities and will be repaid to their rightful owners within 7 days, in case their bank fails. The Eurogroup however and its masters in Berlin, Brussels, and why not in Washington where the IMF is based, did not hesitate to give to Cypriots a long weekend of horror and fear about their life savings. Telling them on Saturday morning they have to forego 6.75% of their deposits and then reducing the damage on Monday.

Is it a test?

Lack of seriousness could be the easy explanation for all that, but it cannot stand a serious examination. It cannot be sloppiness or a wrong estimate that drove the Eurogroup to change its decision over how much the Cypriots will pay out of their deposits, to save the imprudent lenders of the island.

Was it probably an experiment to test the reactions of some hundred thousand Europeans in a case like that? It must be noted that it is not clear if Cyprus is a ‘systemic’ Eurozone member, being in the east-most corner of the Mediterranean. So it can be a perfect case for some sick minds in Berlin, Brussels and why not in Washington and elsewhere to test how the European will react, if they are asked to pay with their own deposits the salvation of ‘systemic’ banks when they go…bust.

This explanation has great relevance in the current economic conjuncture. The truth is that the western governments cannot borrow any more, to pay for more ‘systemic’ bank failures. Government borrowing has reached its limits, and the next credit crunch will be extremely dangerous, if there will be nobody to undertake the cost of recapitalising the banks. EFSF/ESM’s resources may not prove enough. So bank deposits are a very handy victim. The banks will have just to give a haircut to their own customers’ accounts and that’s it.

Then Cyprus may have been chosen as a case, for the rest of the Europeans to understand that their bank deposits can be the subject of a haircut if a difficult conjuncture appears. It’s not only that. The Cyprus case was an easy one because if the small depositors finally don’t pay anything to salvage the banks, most of the cost will fall on Russian oligarchs, as all Germans know very well by now, thanks to the relentless efforts of their country’s major media. Who would shed a tear for the Russian oligarchs? Nobody! But deep in the mind of the average European depositor, the videos showing the people of Cyprus outside the banks not being able to withdraw money, will remain alive for years.

Was it a mistake?

Playing with people’s massive reactions however can be a very dangerous game. The slightest wrong move can destroy everything. So it might not have been that case. Then what?

What if it’s not like that and Berlin, Brussels, Washington and why not Paris simply made a mistake by charging on Saturday morning all deposits in Cypriot banks, but on Monday night  getting wise and ask only the Russian oligarchs to pay? What are the logical conclusions however, if this last explanations of what happened in the Eurozone this weekend is correct? In such an eventuality the logical conclusions, are not less alarming. In this case the whole euro area financial governance must be a much more dangerous affair, than anybody working in the real economy could imagine.

In any case it will be the people to pay the damages.