I am following the proposed depositor haircuts in Cyprus with interest. In general, I am in favour of haircutting bank creditors, including (some) depositors. It is something I pushed for when I worked for the Independent Commission on Banking. Needless to say it was considered far too radical for the UK. Which perhaps it was. However, I was glad to read this piece by Izabella Kaminska on the FT’s ever-excellent Alphaville blog, which gives a clearer exposition of my line of thinking than I could produce myself. An extract:
…I’d argue that what it really represents is the inevitable shift away from a debt funded economy to an equity funded one.
That’s not to say the shift has been managed fairly or logically. I’m with Willem Buiter on the point that it would have been better if small island depositors had been spared. But I’m also with him on the point that this is ultimately a step in the right direction.
It all comes down to the need to capitalise failing banks with equity, and to get creditors taking responsibility for their bad investments.
It’s worth reading the whole piece.