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Since the crisis in the Cypriot banking system became apparent, the position of the German government has been clear: those who have deposited money into the Cypriot banking system – mainly Cypriots and Russians – must be prepared to meet the cost of bailing it out. “Anyone having their money in Cypriot banks must contribute in the Cypriot bailout” argued Angela Merkel. “That way those responsible will contribute in it”. She has been backed up on this by her finance minister Wolfgang Schaueble who has argued that those who, as depositors, lent their money to Cypriot banks, knowingly took a risk and should therefore be prepared to foot the bill.
No doubt, there is some logic to this approach. When a bank is rescued from insolvency, its creditors are the primary beneficiaries of that rescue – and obviously ought to contribute to the cost of saving those institutions that they themselves chose to lend to.
Nonetheless, one cannot help feeling that the German government is afflicted by a mixture of hypocrisy and amnesia. Back in 2008 it was the Irish banking system that was going under. Had the country’s major banks collapsed, the key losers would have been German bondholders who had lent vast amounts of money to these now insolvent institutions.
Unsurprisingly, in this instance Chancellor Merkel was rather less enamoured by the principal that a bank’s creditors ought to pay for the cost of bailing it out. Instead, in a deal that she was instrumental in shaping, the Irish government was compelled to borrow the tens of billions of Euros necessary to save the banks (and their foreign creditors ), and to pass the debt on to current and future generations of Irish citizens – a debt that exceeds ten thousand Euros for every man, woman and child.
The German finance minister has come up with many high-minded reasons why the those who deposited their money in Cyprus have an unusually great responsibility to meet the cost of the bailout. Such depositors, he argued, chose to put their money in a low regulation, low tax jurisdiction, and should therefore be prepared to accept greater risk. But could not exactly the same be said – albeit to a lesser to degree – about those German bondholders who chose to invest their money in Ireland?
Indeed it is becoming increasingly clear that the principles governing the management of Europe’s financial crisis amount to little more than “might is right”. Big bondholders, situated in Europe’s most powerful economies are to be protected. Depositors, and taxpayers, within Europe’s peripheral economies can get stuffed.
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