Italy could do with some market pressure. Rome’s bond yields are now lower than they were before February’s inconclusive election. But as the politicians scheme, the economy burns. With markets calm, there is insufficient urgency to crack on with long-needed economic and political reform.
Cyprus is no longer centre stage. Nicosia has agreed a 10 billion euro bailout deal with its euro zone partners and the International Monetary Fund. A visible bank run has been averted by stringent capital controls. International markets, which only ever suffered a mild bout of jitters, have calmed down.
The Cypriot catastrophe shows just how far away the euro zone is from creating its much-touted “banking union”. There was no euro zone supervision of Cyprus’ big banks, no transnational approach to put them into controlled bankruptcy, no common deposit insurance and no flow of bank rescue funds from abroad.
Cyprus’ capital controls are an “omnishambles”. If the Argentine-style “corralito” really can be lifted in seven days, the damage could be contained. But that doesn’t seem credible. Extended controls could spawn bribery, sap confidence, further crush the economy, spread contagion and ultimately lead to the country’s exit from the euro.
Cyprus’ deposit grab sets a bad precedent. Money had to be found to prevent its financial system collapsing. But imposing a 6.75 percent tax on insured deposits – or even the 3 percent being discussed on Monday morning – is a type of legalised bank robbery. Cyprus should instead impose a bigger tax on uninsured deposits and not touch small savers.