Monitor | It's risk-off again as troika plays with fire in Cyprus
Making bank depositors pay in a debt crisis is nothing new, but the overt tax on Cypriots' savings has plunged the euro zone back into uncertainty
Anyone who thought financial markets had broken out of the risk-on, risk-off cycle that has dominated trading for the last couple of years surely changed their mind yesterday.
In Hong Kong the benchmark Hang Seng stock index tumbled 2 per cent as investors reacted to the proposed bail-out deal for Cyprus by rushing to take their money off the table.
What spooked investors was the attempt by the "troika" of the European Commission, the European Central Bank and the International Monetary Fund to force depositors in Cypriot banks to take a haircut as part of the bail out.
Under the deal announced over the weekend, deposits of more than €100,000 (HK$1.01 million) will be hit with a one-off tax of 9.9 per cent, while depositors with less than €100,000 will pay 6.75 per cent.
Ultimately, in any debt crisis it is always ordinary bank depositors who end up paying. Usually, however, the bill is disguised. For example, the monetary authorities might allow inflation to rise, which shrinks the size of the debts relative to nominal output, but at the cost of a decline in the purchasing power of deposits.
Alternatively, the authorities might hold deposit rates down, keeping the spread between deposit and lending rates artificially wide in order to recapitalise the banks at depositors' expense; the path taken by the mainland authorities following the bad loan crisis of the late 1990s.