In light of "Cyprus," are eurozone uninsured bank deposits vulnerable?

• Position: A SYMPOSIUM OF VIEWS

If told today that you have a forgotten account in a Greek, Portuguese, Spanish, Irish, or Italian bank with $130,000 in insured deposits, would you move those deposits to avoid the repeat of a potential Cyprus-type situation? Or was the Cyprus banking crisis, and taxation of those deposits as part of the financial rescue, an aberration in a largely irrelevant country roughly half the size of Brooklyn, New York (and complicated by its involvement in international money laundering)? What are the takeaway implications of the Cyprus crisis and would you move your newly discovered bank deposits elsewhere?

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Seventeen Noted Thinkers Weigh In

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ROBERT JOHNSON

Executive Director, Institute for New Economic Thinking, and Former Managing Director, Soros Funds Management

Sink or swim? That has long been the Darwinian choice facing each country in the eurozone. And in many ways Cyprus, a small country in the scheme of things, can be seen as just the latest test of Europe's collective resolve.

Yet the Cyprus fiasco also could prove to be a turning point in the ongoing euro crisis. Once again, just enough has been done to keep a member of the monetary union afloat--but not enough to bring the entire European Union to dry land. And in this case, by pretending they were dealing with an isolated country, the nations of the European Union have damaged the faith in deposit insurance throughout the eurozone. This may become a crippling blow.

The rescue of Cyprus was a microcosm of how the nations of Europe have failed to work together to adequately address their ongoing financial crises. In this case, with Germany unwilling to foot the bill for a loan that it had good reason to suspect would never be paid back, the eurozone's finance ministers opted to make the numbers work by going after depositors.

The scheme that taxed even small deposits was eventually abandoned in favor of taxing only those that were uninsured. But the implications to the public were clear. Bank deposits could be at risk in future debt crises. This message was especially significant in Europe, where markets and credit allocation are much more dependent on banking than in the United States.

The so-called "bail in" of depositors (what was called a tax, but was really a haircut in all but name) made the numbers work in the short term. But it has had the long-term effect of undermining confidence in the deposit insurance system across the eurozone, insurance that was one of the only barriers to a full-on banking panic during the early stages of the crisis.

When the next wave of the crisis hits--and eventually it will, as long as Europe continues to rely on half measures to address its problems--depositors across Europe now understand that their leaders have identified a new way to fund the periphery's debt troubles: their savings.

The anxiety this implicit threat creates may already be contributing to a deflationary shock to Europe's credit allocation system at a time when the region can least afford it. At a minimum, the Cyprus fiasco has created long-term instability that mere words--the promise that Cyprus will not be a precedent--cannot settle.

Unfortunately, this means that Cyprus is yet another illustration of the collective action deficit at the heart of the eurozone's struggles. Europe's countries have not yet learned the lesson that they cannot survive alone.

After Cyprus, the eurozone still faces the same question: sink or swim? And each country in the eurozone is still struggling to stay above water.

Even Germany faces potentially catastrophic economic consequences if the crisis is not resolved. The lessons learned in Cyprus have only made the downward pull of financial gravity a little bit stronger. But the monetary union can't survive over the long term without collective action.

A true banking union could have helped prevent the fiasco in Cyprus. And it could be the life raft that keeps Europe afloat.

Perhaps it's time to build that raft. If nothing else, the eurozone countries must find the political will for collective action--or they will each sink alone.

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JIM GLASSMAN

Managing Director and Senior Economist, JPMorgan Chase

Europe's deposit markets are calm in the wake of the (potentially bank-run provoking) first proposal by Brussels that required Cyprus to raise bailout funding from its own banks, possibly seizing money from bank deposits, including a levy on deposit accounts under 100,000 [euro]. Most of the burden would have been borne by deposits above a threshold at both Laiki Bank and the Bank of Cyprus, the two largest lenders. The surprising calm across Europe's deposit markets may provide the best and simplest answer to the question of what you would do with your newly discovered account found in a bank of Europe's struggling members. That's probably the right answer too--that the money is safe--but the answer needs to be right for the right reason in order to be sure your newfound money is safe where it sits.

What are the wrong reasons to be sanguine about the Cypriot situation? The money is safe, because Cyprus is a special situation and unlike anything else in Europe? In contrast to the banking system in nearly all other EU members, Cypriot banks rely on deposits for funding--their capital structure is relatively unique. Many depositors are not Cypriot nationals but rather foreigners. So, could the confiscation have been unique because it was targeted against outside money? That's not very reassuring. Ordinary Cypriots had their money in the same banks and so did many Cypriot and foreign companies, who were conducting business in Cyprus. If the proposal looked like it was an effort to seize funding from possibly illegal activities, it would squeeze all Cypriots' bank accounts and legitimate business accounts. The Cypriot parliament rejected the proposal, because it would have devastated Cypriots and companies probably would have ceased operations in Cyprus and moved elsewhere. This logic probably is not the reason why depositors elsewhere in Europe are not panicking. Perhaps the money is safe because the Cyprus government flat out rejected the first proposal to "haircut" deposits under 100,000 [euro]? Yes, but the political response wasn't surprising. And most depositors probably aren't likely to take comfort in the support of the political system. Perhaps the money is safe because Cyprus is not a useful guide to potential banking crisis response elsewhere? Cyprus is a tiny member of the European community, but it has the precedent set in Brussels and the willingness to violate the sanctity of deposits that could undermine confidence in banks elsewhere.

What are fight reasons to be sanguine? Most know that confidence in the safety and soundness of a country's banking system--a stable deposit base--is key to a healthy economy, because banking provides profoundly positive benefits for modern economies. The invention of the deposit insurance idea broke the cycle of periodic bank runs and credit crunches in the nineteenth century. Europe's existential crisis has triggered capital flight out of the periphery economies to the safety of German banks, because fears that a member might be forced to leave the monetary union and possibly default could mean trouble for the national deposit insurance safety net. If global investors had been pulling money out of Europe, the euro likely would have weakened significantly. That's why European leaders have been desperately searching for a way to create a European-wide deposit insurance mechanism (a banking union). A levy on small deposits would have undercut that effort.

Maybe bank retail customers across Europe haven't panicked in the wake of the Cyprus debacle because they know better. Maybe the bank crisis and the bizarre suggestion to put retail depositors on the hook along with the large players was a refresher course on the importance of stable banking systems to modern economies and the fundamental importance of the sanctity of deposits. You're safe.

This opinion is the author's own and not necessarily that of JPMorgan Chase.

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JARED BERNSTEIN

Senior Fellow, Center on Budget and Policy Priorities, and former Chief Economic Adviser to Vice President Oiden

I would move my deposit. While I sympathize with the challenge facing European policymakers--a veritable 3D chess problem in political economy--they have time and again shown too little consideration for the rights and preferences of the people affected by their decisions.

Think about the psychology of a group of policymakers who, in the midst of a debt crisis on top of a shaky-balance-sheet banking system, would suggest springing a tax on bank deposits on Cypriot savers. Didn't anyone around that table in Brussels raise their hand and say, "Wait a second ... do we really want to levy this tax on everyday savers in a banking system that's already teetering?" After all, history is very clear on this point: Put almost any restriction on savings deposits and people will want them back. And such responses are amplified in a time of financial crisis.

We've seen this same kind of disregard for the impact of their actions--where "they" are more often than not unelected officials--on both public sentiment and people's livelihoods throughout the crisis, whether it's budget cuts, mass layoffs, or reneging on pension contracts. And when the high priests ignore the will of the people, even if they think they've got the economics right...