By Yves Smith
One of the big lessons of the fraught negotiations over bailing out (or more accurately, in) Cyprus’s banks is that deregulating institutions with an implicit or explicit state guarantee is a bad idea. You’ve just given them a license to gamble with the public’s money, and you can rest assured that they will eventually avail themselves of it.
In Cyprus, bank deposits, which in theory are senior (meaning everyone else who gives money to the bank gets wiped out before they lose a penny) are proving to be not so. The reason is that there isn’t much left in the way of equity, there is pretty much no subordinated debt. The senior debt (still junior to deposits) is mainly sovereign or central bank debt. The Germans are insisting on “private sector participation” which means someone other than central banks need to take losses. Joseph Cotterill of FT Alphaville described why the officialdom decided it was too hard to go after the non-central bank bondholders.
