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March 18, 2013

Financial Markets Haven’t Freaked Out over Cyprus (Yet?)

Neil Irwin with the latest on Cyprus:
Financial markets haven’t freaked out over Cyprus. That doesn’t mean we’re in the clear, by Neil Irwin: First the good news: Financial markets have been relatively stable ... over international authorities’ decision to force losses on those with deposits in Cyprus’s banks. ... [There are] signs of an adverse market reaction to the weekend’s news — but not evidence that a broader run on Europe is underway. ...
The modest declines in financial markets Monday are a sign that global investors are betting  that the losses being forced upon Cypriot bank deposits will be a one-off situation, and not form a precedent for future aid to banks in Greece, Spain, Portugal and beyond. ...
After outcry from the people of Cyprus and anyone who cares about financial markets and worries about the implications of a government suddenly seizing a chunk of the money people kept in supposedly safe bank accounts, the terms of the rescue deal were being renegotiated Monday. The most likely outcome is a new deal that protects Cypriots’ deposits up to 100,000 euros, though details were murky Monday. ...
 The international negotiators ... are right that they have principle on their side. It is unfair for the rest of the world to come to the rescue of Cyprus at a time when the Russian oligarchs who have used the country’s banking system to squirrel away money pay nothing. But sometimes it’s better to have a policy that is unfair than one that is destructive. Europe has spent the past three years trying to persuade global investors and ordinary citizens that their money is safe in European banks. They had finally succeeded in the last several months. But the punitive approach to depositors in Cyprus throws that success into new question. ...
See also his discussion in the article about “Deauville,” and the delayed reaction of financial markets to this somewhat similar event. His point is that despite today's relatively calm reaction, we are not yet in the clear.

European policy seems to follow a common path. There is some sort of crisis that results in one group or another having to take a large loss, and the moralizing and fighting over who that should be leads to brinksmanship until, just before things really fall apart, someone steps in with a temporary, kick-the can down the road fix of some sort. This is starting to look similar -- I hope -- but one of these times they are going to misjudge where the brink actually is.

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