I’m rather glad that the Pope managed to mention Abraham in his inaugural mass today. Of all the Old Testament, the tale of Abraham and Isaac is probably about the most relevant to the imbroglio in Cyprus.
The father takes his son to the top of the mount, binds him and is on the point of sacrificing him when, at the last minute, God sends down an angel to stop him. In an analogous way, the Cypriot government, on orders from on high (the eurogroup in this case, not God) has come to the brink of gouging an unprecedented tax out of its peoples’ savings, and, at the last minute, seems to have been offered a reprieve.*
Now, if this were the Bible, the story would end there. Abraham’s faith was tested, and he passed the test. Conveniently, the ancients glossed over the question of what this incident did to the father-son relationship.
However, this is not the Bible, and so we’re left unpicking a relationship that has gone very wrong indeed. There is clearly a widespread sense of betrayal in Nicosia, and one can understand why. Even if, as is the current plan, small savers with less than €20,000 in their accounts are let off the deposit tax, this episode will leave a lasting scar in place. After all, the Government had spent the past few years insisting to savers that any deposits below €100,000 would be safe, protected by its deposit insurance scheme. That it could subsequently play fast and loose with the bank accounts is unlikely to be forgotten.
Even if the Government were to stop short of a deposit tax, it’s hard to see why savers wouldn’t simply withdraw all their cash in droves when the banks reopen (whenever that is) – even if it’s simply to put it underneath a mattress at home. This episode has fatally undermined the element of trust in the banking system – something which is fundamental to the way capitalist economy functions in its current form.
Whether this triggers chaos elsewhere is difficult to predict. Markets have become more unsteady as the situation in Cyprus has deteriorated, but we haven’t yet seen any kind of depositor panic elsewhere, for instance in Portugal and Spain.
However, the story in Cyprus is far from over. Anger is mounting, the parliamentary system is creaking under the weight of the demands coming over from Brussels, and the threats from Frankfurt to cut off emergency funding to the banks if the country doesn’t cooperate haven’t made them any more willing.
Short of a Papal intervention, it’s hard to imagine how to get a happy ending out of this story.
* Yes I know there are some inconsistencies. For instance, it’s debatable whether the eurocrats have ditched the plan or whether it’s simply being rejected by the government, the latter of which would be akin to Isaac breaking free of his bindings and escaping. Plus, Isaac had not borrowed himself so far into penury that he was facing bankruptcy. Nor had he become a go-between for Russian tax avoiders but let’s leave that aside for the time being.