Athanasios Orphanides: Cyprus Precedent Major Blow to European Union
The latest tempest in a teapot, tiny Cyprus, which amounts to 0.2% of the economic output of the European Union, roiled markets early this week when a proposal was floated to tax depositors in their undercapitalized banking system. This wrongheaded ploy dropped Dow futures as much as 150 points Sunday night as fears of bank runs in other weak European cousins Spain and Italy filled investor’s heads.
The preposterous idea of taxing the deposits of savers as part of a plan to bail out the poorly run insitutions was unanimously voted down by the Cypriot parliament last night.
CNBC’s Steve Liesman interviewed former Cyprus Central Bank Governor, Athanasios Orphanides, who worked with the Fed as an adviser from 1990 to 2007 and is currently a professor at MIT. Orphanides likened the Cyprus situation to U. S. state governments blackmailing the state of Massachusetts by threatening to shut down their financial system because they don’t agree with their policies.
Orphanides considered this a major blow to the European integration project. Orphanides doesn’t believe it would be a good idea to open Cypriot banks until the situation is resolved.
Orphanides expressed concern about the peculiar precedent of forcing the Cyprus government to seek help from the Russians in response to the “blackmail” being forced on it by other European states.
Orphanides said confiscating deposits is no way to deal with a crisis, and he added that Germans have benefited handsomely from these crises, in spite of what has been told the German public. As an example, Orphanides said the German government is getting money at essentially zero interest rates and lending it to Ireland at very high interest rates which profits go back to German citizens.
Orphanides was skeptical of the dire situation being painted of the Bank of Cyprus’ need for re-capitalization. He said provisions needed for future hypothetical losses are not based on a realistic scenario.