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10 April 2013

Easter Bunny or Mad March Hare?

The Easter Bunny has popped up with a riddle for all of us this year: “When is a euro not a euro?”

Not a very difficult one, is it? I think we all know the answer. It is when the euro in question is Cypriot.

The bailout of Cyprus – or bail-in, as we must apparently learn to call it – has thrown up some strange consequences.

The first one to note is that, unusually, it has injected an element of sanity into the mess that the eurocrats have created.

Up until now, eurozone bailouts have effectively socialised the entire cost of the failure. In other words, the debt has been passed on to the taxpayer, in some way or another.

This time, the stakeholders in the banks in question (shareholders, bondholders and, yes, depositors) have been left with some of the pain.

Strictly, that is how it should be. There is a moral hazard in passing the debt on to the taxpayer which has been at least partially averted this time.

Unfortunately, the fact that it is morally right does not automatically make it practically effective.

I suspect that the politicians sitting at the top of their ivory towers looked at two issues. The first was that Cyprus is a very small country, while the second was the apparent consensus that at least some of the large deposits held there were of dubious provenance.

Those two considerations are almost certainly true, but fail to go on to recognise the consequences.

The fact that Cyprus is small and largely dependent on its banking sector means that damage to the banks will have a disproportionate effect on the health of the country’s economy as a whole. Indiscriminately targeting all larger depositors because you have suspicions about only some of them will inevitably cause a lot of pain.

It is difficult to avoid the conclusion that damaging Cyprus and its people for years to come in order to protect the euro was seen as an acceptable form of collateral damage.

I can see that for the politicians of the richer eurozone countries, it was worth making the statement to their voters that the profligate could not always rely on being bailed out at the expense of the thrifty. This could again be seen as a morally justifiable stance.

However, changing the interpretation of the rules in the middle of the game – which is effectively what has been done, as if this was right for Cyprus, why was it not right for Ireland, Portugal, Spain and the rest? – leaves uncertainty for the future.

If you suspect that depositors may be asked to share the pain of future deals, why would you leave money in banks in countries perceived to be at risk?

What incentive is there to keep your cash in, say, Spain, Italy or even – whisper it – France? Don’t even think of Slovenia. What about economies traditionally regarded as being as solid as can be, like Luxembourg?

If the Cyprus problem, as perceived by the powers that be, was that its banking sector was too large a part of its economy to be sustainable, be aware that Luxembourg’s is far greater still.

That is the problem with muddying the waters: you never know what is going to be stirred up.

Following the Cyprus bail-in, a great big question mark has now been hung around the necks of – at the very least – the club Med banks, the Russians are annoyed at being implicitly branded as crooks and money launderers, and the social problems of unemployment and poverty in Southern Europe have been greatly exacerbated.

Against that background of uncertainty, the picture for metals becomes even more confused. I have said before that it is asking too much of China, India et al to jerk the world out of its present economic torpor, and that without a resurgence of consumer buying from the West, recovery will be slow.

The USA seems to be moving in the right direction and Japan looks less gloomy now than it has for some time, but Europe remains the sick man.

With the political ineptitude seemingly continuing, it is not so much the cuddly Easter Bunny who has been visiting as the Mad March Hare.

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