DEPOSIT INSURANCE

Deposit insurance is a mechanism whereby a Government guarantees bank deposits, usually up to a fixed amount. Those limits were raised sharply in nearly every developed country, following the financial meltdown in 2008. This reassured savers that their money was safe, and reduced the chances of a bank's being subject to a devastating "run", when savers all decide to withdraw their money at the same time. However, even a guarantee may not be enough, if those same savers think that the Government is going to rat on the deal.

The likelihood of that happening has just gone up a notch, following the agreement by the E.U. to help Cyprus out of its banking difficulties with a Euro10 billion loan. Because one of the conditions is a levy on all bank deposits of 6.75% up to Euro100,000 and 9.9% above that amount. True, the levy is a one-off, and depositors will receive the equivalent amount in the form of shares in the banks concerned. Nevertheless, it represents a forced purchase of those shares, a change to the deposit insurance contract between the depositor and the Cyprian Government, and a change to the practice of E.U. bailouts. Not a good combination.

E.U. leaders are undoubtedly concerned that Cyprus has become a haven for a lot of Russian deposits, some of which may have been acquired in shady or even illegal circumstances. But if that is the problem, then tackle it directly. Taking 6.75% of a Cyprian granny's savings is not going to make a Russian oligarch behave better, but it is going to make other Europeans even more nervous about the things their leaders get up to.

Walter Blotscher