Is Germany’s Merkel the biggest loser in the Cyprus debacle?

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.

Related Posts

• 10 bargains to look for after the next round of the euro debt crisis
• The 50 Best Stocks in the World
• Jim's Watch List

3 comments

• Gorm on 19 March 2013

  You conclude Merkel could be hurt most. I think we all will as so many countries are in dire straits and OPM always seems the obvious political solution – especially when so few are adversely affected.

  BUT what happens when a depository is no longer selected on some guarantee, ie FDIC, but the financial strength of the bank (Weiss Research), or the country?

  Will more money move to Australia (safety) and out of those banks, countries where LIQUIDITY is already a concern with ailing banks.

  What ever happened to responsibility and accountability? Too many banks are too protected to the detriment of depositors and citizens.
  There is NO EXCUSE for the STUPIDITY employed by Cyprus banks investing in Greek bonds.
  Gorm
• KFed on 19 March 2013

  I don’t like the idea of hitting bank account one bit. But what would be the consequence if Cyprus is kicked out of the Euro zone? Would that be worst for Cyprus and would all the money in the Cyprus bank turn into funny money? I wonder why no one talk that consequence for Cyprus.
• Darren on 19 March 2013

  Still don’t understand how a country with an economy roughly the same size as Shreveport, LA ends up needing a $12,900,000,000 bailout to begin with.