Cyprus vetoed the controversial bailout offered by the eurozone's finance ministers on Tuesday. Why were the terms of the bailout controversial? What does it mean for the rest of the eurozone?
GlobalPost talked to Michael W. Klein, the William L. Clayton Professor of International Economic Affairs at Tufts University's Fletcher School.
Why did the Cyprus bailout package cause such uproar?
With insured deposits, there is a guarantee that there will be no confiscation of depositors’ money. Even just the fear of a bank run can lead to a bank run. In the 1930s, none of the deposits were guaranteed by the government and that led to bank runs, which in turn deepened the Great Depression. Government guarantees on insured deposits took away most of those fears.
[The Cyprus bailout] is a little bit of crossing the Rubicon to start charging depositors a tax on what they perceived to be insured deposits.
The real concern is not so much what’s going on in Cyprus, but if this becomes a method by which bailouts are funded. Then, there is concern that this could lead to bank runs all over Europe, as other countries’ banks are imperiled.
If the same kind of thing happens there, it could be really problematic.
What are the potential risks of a bailout that includes taxes on depositors’ accounts? Is it a bad precedent to set?
I think it is a bad precedent. It doesn’t distinguish between bad banks and good banks. And it means that deposit insurance might not mean what they say it means.
The bank run is an infrastructure thing because then banks start to shut down and it starves the economy of credit. Historically, we've seen that in situations where banks fail, the depressions that ensued were deeper, more severe and more protracted than recessions that arose for other reasons.
Read the full piece