March 16, 2013

The Cyprus Bailout, Deposit Guarantees, and the Single Market

Here at europaeus|law, we're monitoring the intense fallout from the announcement by the Eurogroup last night that the Cyprus bailout will be conditioned on an "upfront one-off stability levy" on deposits in Cypriot banks.  The levy -- 9.9% on bank deposits exceeding 100,000 euros and 6.7% on anything below that -- will take place on Tuesday after a bank holiday on Monday.

There will no doubt be much more to be said about this in the coming days and weeks, but we note the general expectation that the levy, as structured, will hit small depositors in Cyprus banks especially hard.  Moreover, we want to point out the potential impact that the bailout conditions will have on the single market, notably harmonized deposit guarantee schemes.  As Open Europe asked on its blog:

"Does this move break EU rules on capital controls and/or deposit guarantees? As noted above, it seems that depositors will be blocked from withdrawing their funds from banks. For other EU depositors this surely amounts to a form of capital control – strictly forbidden under the EU Treaty. Furthermore, as Sharon Bowles MEP has been tweeting, this move makes a mockery of the current EU rules on deposit guarantees below €100,000. The Eurozone may protest that the bank shares given in exchange are of the same value, but this is a very thin argument. Either of these issues could be challenged at the European Court of Justice."

Bowles, a Lib-Dem MEP and chair of the EP's Economic and Monetary Affairs Committee, has now issued a press release entitled "The Cyprus bailout deal is a disaster for EU rules andSingle Market principles".  She writes:

"This grabbing of ordinary depositors' money is billed as a tax, so as to try and circumvent the EU's deposit guarantee laws. It robs smaller investors of the protection they were promised. If this were a bank, they would be in court for mis-selling.

"The lesson here is that the EU's Single Market rules will be flouted when the Eurozone, ECB and IMF says so. At a time when many are greatly concerned that the creation of the 'Banking Union', giving the ECB unprecedented power, will demote the priorities of the Single Market, we see it here in action.

"Deposit guarantees were brought in at a maximum harmonising level so that citizens across the EU would not have incentive to move funds from country to country. That has been blown apart.

"What else will be blown apart when convenient? All the capital requirements we have slaved over, what about the new recovery and resolution rules? What does this mean for confidence in cross-border banking and resolution and preventing the fragmentation of the banking sector?

"When the dust has settled on this deal, which I hope it never does, we will see that the Single Market has been sold down the river for a shoddy price. All the worse as the consequences for Cyprus of the Greek bond haircuts were obvious."

On FT Alphaville, Joseph Cotterill (admitedly very half-heartedly) tried to play devil's advocate on this point, noting:

"It’s not as if Cyprus is going out to people and saying sorry, we can’t honour what you’re owed under the depositor guarantee scheme. The levy is parallel to the government’s obligations there. Securing the official loans on Friday night if anything made the looming risks of holding a deposit in a Cypriot bank fade away. These were the counter-party risk, and also redenomination risk, assuming the alternative to a bailout was Cyprus leaving the euro."

There are, of course, numerous other legal issues to consider, as Cotterill points out, quoting a prescient piece last year by Lee Buchheit, Mitu Gulati and Ignacio Tirado. But for now let's focus on on the issue perhaps most on the minds of a network comprised of academic specialists in European law: the impact of the Eurozone crisis on the single market, the cornerstone of European integration for decades.  We'll try to follow up with more updates on this point as events develop, but we invite network members and other readers to chime in as well.


  1. Dear Peter,
    Much to be said but, for now, and having been involved in the Icesave litigation, I cannot but note the irony of seeing the Commission and Netherlands for example - which argued in that case that states were OBLIGED to UNDERWRITE, whatever the circumstances, the deposit insurance guarantee - now IMPOSE on one such State to UNDERMINE the guarantee....)

  2. We received the comment below from network member Dan Kelemen (Rutgers) and we're pleased to post it on his behalf:

    Dear Peter,
    In the history of stupid policy ideas, the proposal - (I call it 'proposal' in the hope it may still not be enacted) - to impose a haircut on depositors in Cypriot banks deserves an exalted place. It is as if those demanding this levy didn't realize that the EU is simultaneously working on a common deposit guarantee scheme as part of the effort to create a European Banking Union. It seems that in an ill-advised effort to suck some money out of shady Russian oligarchs, the EU is shooting its own Banking Union plans in the foot. The only potential upside - for those that favor banking union - is that this whole debacle may highlight once again and perhaps more boldly than before the need for a banking union.
    Dan Kelemen