News of the jaw dropping proposal to raid bank deposits in Cyprus as part of a bail out deal has reverberated around the world. The response by and large has been one of incredulity and anger. Aside from the fact that it looks and feels like morally indefensible legalised state sponsored theft, the unintended consequences could be disastrous. It will damage the fragile Cyprus economy, perhaps fatally but elsewhere the same raid could be repeated in other EU economies under stress for example in Italy or Spain leading to a run on the banks. Spanish banks are already in a precarious state through bad debts from failed property developers. One commentator suggested this could trigger a bigger financial crisis in the global banking system than the aftermath of the Lehmann crisis in 2008. It could also lead to capital outflows from the EU as overseas investors look for more secure places for their money. In addition it damages a key pillar to the EU banking system – the trust of ordinary people in the EU bank deposit scheme that is intended to guarantee 100,000 Euros per institution. What is the point of this if Eurocrats can drive a horse and carts through it? The public may feel the safest place for their cash is under the bed, the last thing the banks need. This all owns up to a massive own goal in how to destabilise the banking system and the Eurozone.
The FTSE 100 fell 1.5% in early trading this morning. Expect volatility on global stockmarkets. As for the UK aside from the compensation of the UK tax payer to army and government personnel in Cyprus I do not expect an impact on bank deposits here.