Daily Archives: March 19, 2013

James Mackintosh

I have a lot of sympathy with the explosion of outrage both within Cyprus and internationally at the decision to default on tax depositors of its banks.

It is just wrong that depositors, even large Russian tax-avoiders, are suffering while other senior bank creditors are excluded. It is wrong that Greek depositors in Cypriot banks are excluded, even though it was the Greek assets bought in large part with those deposits which caused a lot of the problems. And it is particularly wrong that small depositors are being hit, making a mockery of the deposit guarantee scheme.

Yet, there is risk in everything, and depositors were being compensated for the riskiness of Cypriot banks through higher interest rates. This chart shows the deposit rates paid on fixed-term deposits of less than a year (much of Cypriot deposits are fixed term, although even overnight deposits pay more interest than the rest of the eurozone).

Deposit rates in Cyprus and Germany

Now, it is fair to say depositors generally don’t realise the risks they are running. Even when they do realise, they mostly don’t care (as Icesave showed in the UK): that’s the whole point of deposit guarantee schemes, after all. But in fact the compensation paid for the risk that it turned out depositors were running was about right. Read more