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).
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
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James Mackintosh is the Financial Times' Investment Editor, writing and presenting the daily Short View column and video. In 16 years at the FT his posts have included comment editor, motor industry editor and hedge funds correspondent, as well as spells in the Parliamentary lobby and Paris. He was the first reporter hired for FT.com, joining two weeks before it launched.
John Authers is the Financial Times' Senior Investment Columnist, writing the Saturday Long View and a regular Monday column. In a 22-year career at the FT, his previous posts have included global head of the Lex column, investment editor, US markets editor, Mexico City bureau chief and US banking correspondent. His latest book is The Fearful Rise of Markets. 