When the officially unnamed EuroGroup of eurozone finance ministers cooked up a deal where all depositors in Cyprus would be taxed to bail out the nation’s banking system as a condition for the $13 billion bailout, they adopted a new rule for banking: depositors are lenders to the banks.
Previously, depositors had first claim on all bank assets. Bondholders had no claims until the depositors’ claims were settled 100%. But the EuroGroup attempted to change this ancient law. Depositors were quietly redefined as run-of-the-mill creditors. “Line up!”
The president of Cyprus agreed to it. But the Cypriot Parliament rejected the deal. This surprised the finance ministers. It surprised the president. It surprised the central bankers of Cyprus. They thought they had a done deal.
The EuroGroup backed down on Sunday, March 24. It will still supply $13 billion in bailout money on its own authority — unofficial authority. But instead of a tax on all Cypriot depositors to save the other Cypriot banks, the central bank has closed one bank, created a replacement bank, and has guaranteed the busted bank’s deposits under $130,000. This has buried the EuroGroup’s attempted theft of the depositors of all Cypriot banks.
The EuroGroup came close to re-defining banking law for the eurozone. This was calculated to save the bankers. Instead of remaining 100% liable for the safety of depositors’ money, which banking law has always mandated, the bankers were going to get a bailout: the governments would tax all depositors as if depositors were mere creditors to the banks. They would have to line up to get their money back. Other creditors would have had equal claims. This would include bondholders. Not now. The bondholders of the busted bank will lose 100%.
The EuroGroup came close to imposing a new definition of banking on all countries in the eurozone. It has failed for now. This is good news for bank depositors in the eurozone. But the EuroGroup came very close to pulling off this coup.
When the EuroGroup faces another banking crisis, which it will, it may attempt to reassert this new doctrine as a condition of the bailout. If it does, this will redefine banking law. Depositors in the eurozone may not understand what almost happened to them. They almost became the scapegoats for the bankers’ follies.