Lessons of Cyprus
The deal hammered out for Cyprus last night isn't "fair". Angry Cypriots are right about that. In important respects, Cyprus has not received the same treatment as other bailed-out eurozone economies.
That is partly because Cyprus and its banks are an extreme case, but it is also a matter of timing. The brutal truth is that the Cypriots held out too long.
Rightly or wrongly, European officials and the IMF think markets are confident enough now to take a lesson in "creditor responsibility". If Cyprus had gone for help when investors still thought the single currency was about to explode, it would have had a stronger hand.
Robert Peston is right to point out the disastrous consequences of the bailout for the Cyprus economy. Depositors with more than 100,000 euros ($130,000; £85,000) in the bank are going to lose billions.
The fact that the exact penalty won't be known for some time, with many accounts frozen entirely while that is decided, only makes things worse. It is hard to see how anybody is going to get any credit in this country in the foreseeable future, and an economy without credit is an economy that cannot do very much at all.
As I said on the Today programme this morning, the short-term implications for the rest of eurozone are clearly much less serious. Cyprus only accounts for less than one quarter of 1% of eurozone GDP.
Some will obviously be concerned about financial contagion - the risk that depositors and investors in Italy or Spain will look at this deal and wonder if they could also lose out if their bank got into trouble.
The officials who negotiated this deal are pretty sure that the hit to depositor confidence will be less than if the Cypriot government had been able to go ahead with last week's plan and raid the accounts of even small-scale depositors. After a week of foolish wobbling, the eurozone has decided that deposits worth up to 100,000 euros are sacred after all.
However, I'm not sure we're quite back to where we were a few weeks ago. The nasty way that this crisis has been resolved - and the message that has now been sent to private creditors - may well have lasting implications, even if the agonies of the Cyprus economy do not.
To obtain help from its fellow eurozone members, a country has been forced - at financial gunpoint - to destroy the part of its economy that has accounted for most of its growth for more than a generation. It has been told that this has to happen, without even a vote in parliament.
The Irish got a taste of this when they were put under pressure in their bailout negotiations to raise their low rate of corporation tax. Dublin was able to resist. As I said at the start, Cyprus had given itself a weaker hand.
The lesson to private creditors from Germany, the IMF and others at the negotiating table last night would seem to be that things are getting back to normal, and that normality cannot just mean that stock markets and bond prices continue to go up.
We have had nearly five years when governments were nervous of suggesting that anybody could lose anything they lent to a bank, either as a depositor or an investor. For creditors and depositors with more than 100,000 euros in their account, the message is that this is no longer true.
Officials think the markets are strong enough to take this lesson in creditor responsibility. We'll find out soon enough if they're right.
The Dutch finance minister has now publicly confirmed what I suggested earlier, that the Eurogroup wanted to send a new, tougher signal to private investors with the terms of this deal for Cyprus. Jeroen Dijsselbloem, who is also president of the Eurogroup, has told the FT and Reuters that the Cyprus programme is a "template" for future Eurozone bailouts, and that European leaders are indeed now committed to "pushing back the risks" of those rescues on to private sector creditors.
Investors have finally taken the hint: bank shares have fallen sharply since the interview was published. Markets had previously rallied this morning, in response to the deal.
Interestingly, Mr Dijsselbloem acknowledged that there had been concerns within the Eurogroup about the potential market implications of taking a tougher line, even in today's calmer environment. That was why they were initially willing to let even small deposits bear part of the cost of the rescue plan, and not senior bondholders.
So, you could say that Cypriot politicians did the hardliners in the Eurogroup and the IMF a favour last week, when they refused to sign up to Plan A. It gave the troika the chance to do what some wanted to do at the start: to negotiate a deal which would not be a special case and would indeed set a precedent for the future, at least in its treatment of the private sector.
"Bailing in" ordinary savers is not part of any sensible template for dealing with future European banking sector problems. But bailing in senior bondholders in troubled banks was supposed to be part of that more disciplined future. And now it has actually happened, in a serious way, for the first time since 2008. On top of that, unprotected bank deposits over 100,000 euros have actually been left unprotected.
As I said earlier, we'll find out soon enough whether bank investors outside Cyprus are ready for this lesson in self-discipline. In the meantime, those domestic opponents to the first version of the bailout plan appear to have done no favours to the Cyprus economy at all.