The biggest loser in the Cyprus bailout chaos may be Germany’s Chancellor Angela Merkel.
Everybody is worried about contagion from the chaos in Cyprus over plans to hit Cypriot savers with a 7% or 10% or something charge to whatever they have on deposit with banks. That plan—essentially taking money out of savers’ pockets to bail out the country’s banks and lessen the money that EuroZone taxpayers will have to put up in any bailout—led to a run in Cyprus on ATMs over the weekend and an extension of a one-day bank holiday today into a four-day holiday that runs through Thursday. The worry was that banks in Spain, Italy and France might suffer a run as savers said, “Why can’t it happen here?” And that interest rates on Spanish and Italian bonds would soar. And that the euro would plunge.
It certainly hasn’t been a great day for European stocks—the French CAC 40 was down 0.48% and Spain’s IBEX 35 index fell 1.29%–or the euro—down 0.78% against the U.S. dollar and breaking support at $1.30.
But I’d argue that the biggest contagion effect, one that’s still to be measured, is in German politics. German Chancellor Angela Merkel didn’t exactly wow legislators in last November’s vote on the Greek bailout. That measure passed with just 297 votes—a four-vote majority. That was an extraordinarily weak result considering that Merkel’s coalition controls 330 seats in the Bundestag. Merkel’s worries about being able to get another bailout through the Bundestag and about polls that show her party in a dead heat in the September elections played a major role in structuring the Cyprus bailout to reduce the money that EuroZone taxpayers would have to pony up by putting a substantial burden on Cypriot savers. But it’s not clear that the window dressing will get her much credit with voters—or with her own party.
And the opposition Social Democratic Party may be tempted this time to oppose the deal, figuring that a No vote in the Bundestag would leave Merkel twisting in the wind. Every bit of erosion in Merkel’s position, of course, gives her less room to maneuver on EuroZone issues. The biggest effect of the Cypress crisis, therefore, may be a further hardening of Merkel’s position on the French budget deficit and on the need to offer Italy, France, and Spain something other than more austerity.
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