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Accord in Cyprus won't be a euro solution

| Monday, March 25, 2013, 8:42 p.m.

WASHINGTON — Europe called a mulligan.

Ten days ago, they arrived at a deal to rescue Cyprus in part by taking money out of depositors' accounts in the country's banks. The reaction was an unpleasant one, with the precedent of seizing money from European banks even for small depositors whose deposits are theoretically insured prompting new tremors of worry about the euro currency union.

They tried again this past weekend, with the same characters meeting in the same conference center in Brussels and hammering out the same issues. The new deal they came up with is a cobbled-together thing that fixes some of the most glaring problems of the earlier one. In particular, people with deposits in solvent Cypriot banks will no longer face the tax on their deposits. Even at the problem banks, Laiki and Bank of Cyprus, people with less than 100,000 euros in deposit will face no losses, consistent with Europe's bank deposit guarantee.

But the cost of protecting smaller depositors is that those with large deposits at the two problem banks are looking at huge losses — 40 to 50 percent, not the 9.9 percent in last week's deal. Much of that money represents deposits of wealthy Russians, who will be none too pleased with seeing their savings evaporate. Don't expect simmering diplomatic tensions between Russia and Western European nations to go away anytime soon.

The Europeans have found a way to bail out Cyprus that navigates the various imperatives they faced.

Germany's upcoming elections make Angela Merkel's government reluctant to undertake open-ended bailouts. The International Monetary Fund doesn't want to throw good money after bad by giving emergency lending to a country that will never be able to repay it.

And the European authorities don't want to undermine their communal bank deposit guarantee scheme before it has even really gotten going.

The question was always who would be stuck holding the bag. Cypriot taxpayers, Germany and the other stronger nations of Europe, or the depositors with big accounts in Cypriot banks (the list includes wealthy Cypriots, Russians, Brits and other international savers). The answer, overwhelmingly, has turned out to be the last of those, which is how the “troika” negotiators of the European Commission, IMF and European Central Bank navigated the constraints they were facing.

If you are a depositor in a European bank, you have every incentive in the world to move your money somewhere safer the minute you detect any hint that your nation could end up in the same place Cyprus did. The next time there is a banking panic in Europe, it will move much faster, and be much harder to control, than those of the recent past, as depositors try to get ahead of losses to come. And that's a scary proposition indeed.

Irwin writes the Econ Agenda column for The Washington Post.

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