Cyprus update

These points are from scattered but I think reliable tweets, of course stay tuned for updates.  The Cypriot Parliament wants more time to debate, so they will not be rubber-stamping the depositor haircut measure today, as had originally been the plan.  In theory they are now voting Monday, although presumably that stands in doubt too.  The German Parliament would not have passed the bailout at all, without the depositor haircut or something similar.  This stance could cause other eurozone nations to reevaluate their future policies and also current bargaining strategies.  The EU will not rule out “deposit assessments” for future bailouts.  As I’ve written, the smooth running of this gambit would not be good news either but would lead only to a raising of the stakes with a replay of the basic game.  Barclays thinks that significant bank runs elsewhere are unlikely; in my view the longer-run ramifications most likely operate through changing the incentives of other eurozone member governments, which now can expect a lower share of the surplus from any bargain.  Morgan Stanley is less optimistic.  Note that Cyprus had met the Maastricht hurdle before the crisis.

The broadest lesson of them all concerns the dangers of framing when you play the same game over and over again (attn: U.S. fiscal policymakers).  German policymakers/voters have felt backed into a corner by repeated bailouts and that is when stupid choices start being made.  This could go down as a blunder of historic proportions.  It also shows that EU governance already is a disaster and profoundly anti-democratic in the worst sense of that term.  A second general lesson is that modern politics cannot sustain wealth taxes very well, unless those taxes have a very long history (property taxes) or are extremely non-transparent, such as the lack of inflation indexing on U.S. capital gains levies; the intolerability of the deposit confiscation is closely related to the issues surrounding the stickiness of nominal wages.

Further update: Cypriot bank holiday further extended through Tuesday…And here are thoughts from Matt Yglesias.


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