Gwynne Dyer: Great bank robbery that could kill of the euro

Strictly speaking, the Greek-Cypriots are not having a bank run, because their banks have all been closed since last Saturday and the cash machines will only give out 500 euros per customer. But there would certainly be a nationwide bank run if they reopened the banks without strict limits on cash withdrawals and transfers overseas.

A financial disaster in remote Cyprus will not directly affect the fate of the rest of the European Union, but any suspicion that the bailout of a EU country might involve the actual confiscation of money in people’s bank accounts is financial and political dynamite. The terms of the Cyprus bailout have just confirmed that suspicion.

The banks in Cyprus had certainly got too big for their boots. They had grown fat on the deposits of Russians, many of whom were using the island republic as “a gigantic washing machine” to launder illegal funds. And they had lent out far too much money, especially to Greek banks and companies: their loans amounted to eight times the entire country’s national income.

Everything seemed all right until Greece’s economy crashed and needed not one but two bailouts. During the second one, last year, foreign investors holding Greek bonds were forced to take a “haircut”: they had to agree to a 70 per cent cut in the value of their holdings. That gave Greece a little relief, but it plunged the Greek-Cypriot banks into a nearly terminal crisis.

So now it was Cyprus’s turn for a 17 billion euro bailout – but this time it was not the bond-holders who got a “haircut”; it was the depositors.

Cyprus was ordered to raise 5.8 billion euros of the bailout money itself. It was to do it by confiscating 6.75 per cent of the money in the savings accounts of everyone with less than 100,000 euros in their account, and 9.9 per cent of the money in all larger accounts. In most people’s eyes, that is just straight theft. Worse yet, people in other EU countries realised the awful truth: EU bailouts can cause bank runs.

How did the geniuses who designed this bailout get it so wrong? They included the European Central Bank, the European Commission, and the International Monetary Fund, but the real culprit appears to be Germany. Wolfgang Schaeuble, the German Finance Minister, insisted on targeting bank accounts in Cyprus (although they have never been directly raided in any other bailout), and the rest of the geniuses went along with it.

So Greek-Cypriots took to the streets in protest, and they didn’t go home when the government promised to exempt accounts with less than 20,000 euros in them. Newly elected President Nicos Anastasiades urged parliament to back the bailout, but in the vote on Tuesday not a single MP supported it.

The whole deal is dead, and Schaeuble is now warning that the banks in Cyprus may never reopen if it is not resurrected in some form. Cyprus’s finance minister is off in Moscow to see if the Russians will bail the country out. But the real crisis may be happening in other EU countries that are vulnerable to a bailout, including Italy and Spain.

The geniuses swore that the Cyprus bank heist was a one off, and that no such measure would ever be imposed on another EU country. Nobody in Spain or Italy believes them, of course, and the wealthy and well-informed will already be moving their euros to accounts in other countries. The less rich and knowledgeable will just be taking their money out of the bank and hiding it in socks under the mattress.

Could all this end up with bank runs that bring down the euro itself? It’s still unlikely, but it’s certainly not impossible.