Don’t make promises you can’t keep. Wise parents tell small children that, and wary lovers use that command as a taunt. But in the world of finance, unrealistic promises are the norm, and they are too often broken. Depositors in the banks of Cyprus may be learning that lesson.
True, the government of the Mediterranean island may retreat from its first plan, and in any case the accounts are to be taxed, not written down, so the terms of the deposit insurance will be technically kept. And strictly speaking, deposit guarantees are not being breached in the United States and other countries with an inflation rate higher than the interest rate paid on savings accounts, even though that inflation-tax steadily erodes the accounts’ real value. But in fact, governments – both small and suspect like Cyprus, and large and respectable like the United States – have failed the lovers’ test. They have made promises to savers which they either cannot or will not keep.
These trust-breaking governments can resort to the errant lover’s usual excuse: we could not have known what the future would bring. Just as bitter experience somehow invalidates a promise of undying love, an impossible-to-predict avalanche of bad loans might erase the obligations of Cypriot banks and the equally unpredictable financial crisis could exculpate monetary authorities in the United States and elsewhere. Such events, they can say, are like the acts of God which invalidate insurance policies.
Lovers’ quarrels are a delicate matter, but it is not hard to judge the promises made by the Cypriot government. It should have known better. There was nothing like the financial equivalent of an asteroid collision. The authorities could either have kept the banks from expanding wildly without sufficient buffers against losses, or they could have refused to issue an unaffordable guarantee.
States which use inflation and low interest rates to break their promises may be more suave about their promise-breaking, but they are also guilty of a breach of faith. They obey the letter, but violate the spirit of their commitments.