Referring to the list of the top 10 most popular posts on the Journal’s website, the site introduces the matter by stating: “Cyprus is here (in the most popular post list), unsurprisingly as the crisis enveloped that Mediterranean island this year.”

In the post in question, Stephen Fidler reported on the bailout agreement settled in March in which he wrote: “The Cyprus bailout agreement that emerged Saturday morning in Brussels has already spurred some thoughtful observations. Without going over similar ground, here are some other thoughts. Finding the path of least resistance: Euro-zone decision making is not a matter of grand design or of optimizing outcomes, but a question of finding the path of least resistance. It’s messy, and deals are usually forged at the last minute by sleep-deprived ministers.”

He asserted then that “because of Cyprus’ special characteristics — a huge and weak banking sector relative to the size of the economy with a small amount of debt, and a relatively small marketable government debt, mostly issued under English law — on this occasion the path of least resistance was to tax bank depositors. It is hard to see another eurozone economy where other options would not be easier than burning depositors. On the other hand, if it isn’t to be the last bailout, it will probably be the last where foreigners bear the brunt of losses. In other peripheral countries, government bondholders and bank depositors are overwhelmingly domestic, — which means big knock-on effects for domestic economies in the event of restructuring.”

Amongst other points, Fidler referred to property rights, which he asserted are conditional when in a financial crisis. “There seems to be widespread shock that bank deposits are not sacrosanct, and are being taxed by the government. But taxing is what governments do, and this is the kind of thing that happens in a financial crisis — though often property rights are diluted less dramatically, through inflation. Faisal Islam of Britain’s Channel Four points out that British depositors in Cyprus are still probably better off, even after a 6.75% tax, than they would be had they kept their deposits in the UK, where savings accounts have been yielding less than inflation for some years and where the pound has devalued against the euro.”

And he concludes: “It’s clear that solidarity among governments in the euro zone is limited and conditional, and that euro-zone creditors are increasingly inclined to mix 'bail-ins' with their 'bailouts'. But while getting debt down to sustainable levels is essential to escaping the crisis, in the short-term it can undermine financial stability. While this is threatened, the European Central Bank and its satellites have to step in — as we shall probably see when Cypriot banks open their doors again. The less governments step in to help others out, the more the Central Bank provides the essential glue keeping the euro zone together.”

Source: InCyprus