Will they get on after an exhausting week? (flickr: doggenhaus)

A short update on the deal that was “struck” last night:

It is constructive, for it has many desirable features:

• The disproportionate damage falls on those who took credit risk vis-a-vis banks that are now insolvent
• no laws or promises have been broken
• The creditors of still more or less healthy banks contribute nothing or next to nothing
• Creditors of both morose banks (Laiki and BoC) are effected in comparable ways, and bond-holders are invited to share the pain in accordance to where they are in the capital structure
• The decision of the amount of haircut is set not by politicians, but based on the money that’s actually in the bank after the EU bailout is in place also.
• The EU has demonstrated commitment to bank resolution. It resolved a bank insolvency by putting in place the framework for an orderly wind-down in one case, and what amounts to an orderly re-structure in the other case.

It has a few shortcomings, which I will list below, but overall, it is a surprisingly level-headed solution where, on the face of it, it appears politics actually was in the back-seat for once, and financial wizards went coldly through the numbers after having analyzed all the available facts. Perhaps the acuteness of the crisis following the previous weekend’s plan to touch the deposit guarantees was really necessary to focus the minds, get the career politicians off the table, and let the realists do their work.

Just for completeness, the negatives are

• Depositors may or may not end up paying more than they would in a bankruptcy. This is because the 9% capital buffer in the “good” bank (which would not have to be financed in a bankruptcy) is financed both by their haircut  and partly by the 10bn from the EU. It’s hard to say, therefore, whether — compared to a bank bust — they will pay less (because other money comes in) or more (because they have to finance more than they otherwise would).
• Implicitly, the Cypriot depositors are paying for the Greek restructure, since it was that process which brought the Cypriot banks down. One might conceivably view this as politically unfair. But I am not sure about that. Depositors, by and large, knew very well about  the link of Cypriot banks to Greek sovereign solvency, and got higher interest rates to compensate them for that risk. No-one with more then EUR 100,000 in the bank should be expected to be completely blind to these risks.
• We still need a framework to deal with the likely knock-on effects on business accounts. Many businesses will have a severe liquidity crunch coming on, and there has to be a solution for this. In effect, the EU’s 10bn must find their way into that part of the system, and the mechanism for that is not yet in place.

That’s really about it. I think the Troika has made the (still pretty terrible) best out of an awful situation. The balance of damage between the EU and the savers respects the fact that solidarity is in place, but has limits at precisely the point where individual responsibility starts.

What to say to those  who still claim the EU was bullying and won’t dare to treat Spain or Italy the same way? You are right, they won’t get a bailout package worth 55% of their GDP.

Cyprus has a long road ahead, but it’s no good hoping for a better deal. This one really is as good is it could have got, financially and politically.