The latest idea for solving the Cyprus crisis: Instead of taking money from depositors, just convert their holdings into five- or ten-year CDs. That comes from economists Lee Buchheit and Mitu Gulati, and advanced by Felix Salmon at Reuters and Matthew O’Brien at the Atlantic.
My first reaction here was, hey, how much would you pay for a ten-year CD in a Cyprus bank? Do I hear 100 cents on the dollar? No? Puzzling through it more, I see the justification better. Cyprus’s problem is no longer how to raise 5.8 billion euros to fund a bank bailout. It’s what to do when tens of billions in bank deposits leave the country. It may not happen literally overnight, because some of that is already tied up in timed deposits, but right now it is exceedingly likely it will happen.
There’s no good answer here. Converting deposits into longer-term CDs is a plausible one. James G. Neuger reported earlier this week that in European negotiations Cypriots rejected a much earlier plan to tax large deposits by as much as 40 percent. Converting the deposits into long-term CDs would cut their current value just as much, or more. The bottom line is that any such plan will cost depositors a lot more than the tax.
In an earlier post I defended the deposit tax as the least of the harms that could be imposed on Cypriot bank clients, both residents and the often-cited Russians. (NB: As a Russian emigré myself, it does not strike me as obvious that all money in the hands of Russians must be ill-gotten.) I’ll stick to that, though with the caveat that it would be the best option if it wouldn’t lead to a bank run. Unfortunately that’s not the world we live in.
Right now, if (stress the if) there’s any way for Cyprus to prevent a bank run, it’s either to lock up those deposits by fiat or for someone to guarantee deposits both large and small. A possible solution here is to trade potential future Cypriot natural gas revenue for that kind of guarantee. The bad news is that doesn’t look in any way likely to come from the European Central Bank. Which leaves Cyprus turning to Russia — a geopolitical outcome that Western Europe will come to regret.