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Deposits in Cyprus

It has become accepted policy that when banks collapse, depositors should not bear any losses. However, in the case of Cyprus, it appears that, as part of the country's bailout by the EU and IMF, depositors are being asked to take a haircut in the form of a levy on savings. This levy has just been rejected by the Cypriot parliament - story here.  The wider fear in the EU is that once the principle of depositor levies has been accepted, it makes banks in other weak economies susceptible to runs because depositors no longer believe that their deposits are 100% secure.

One reason why the levy has been proposed is that the EU is reluctant to bail out the foreign depositors of Cypriot banks.  It is reckoned that up to one half of deposits in Cypriot bank accounts are from Russia. According to a report in Der Speigel, a euro-zone bailout of Cypriot banks would mainly benefit Russian oligarchs, business-people, and gangsters (click here). Bailing out banks is a bad idea and simply increases risk taking and the probability of requiring a bailout in the first place. Depositors either need to be willing to take losses or require bank owners to be willing to provide funds in the case of a bank being unable to repay its depositors in full.

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