EL-ERIAN: Here Are 4 Reasons Why The EU Took Such A Risky Approach For Cyprus
(The terms of the deal include an instant, 10-percent "tax" on deposits held in Cypriot banks before the banks re-open this week, which is being widely-panned as unfair by critics.)
El-Erian also thinks it's unfair.
"By choosing to include all deposits and not just the large ones, thus penalizing all segments of the population, officials opted for a highly regressive approach that also undermines the traditional construct of deposit insurance schemes around the world," he writes.
Nonetheless, according to El-Erian, the EU had four valid reasons to make such an unprecedented move.
First, El-Erian says, given the problem – which stems partly from the enormous size of the Cypriot banking system relative to GDP – depositors are partly to blame.
"In entrusting funds to Cypriot institutions, depositors (and especially foreign depositors) inadvertently funded the over-extension of the banking system, both domestically and abroad," writes El-Erian.
Second, much has been made about the "Russia angle" in the Cyprus deal. Because Cyprus is viewed as an off-shore tax haven for Russian oligarchs mafia types, many worry that the move could anger those depositors.
El-Erian thinks that is a good thing, though: "By killing once and for all the notion that Cyprus is a safe and lax offshore haven, the levy serves to limit such intermediation [of funds from dubious origins] in future."
The third valid reason for a deposit haircut, according to El-Erian, is that the alternatives seemed worse. Someone was going to lose out in this deal. For the two reasons outlined above, it might as well be the depositors.
Finally, this will serve as a "wake-up call" for investors who thought the ECB had fixed everything with its "whatever it takes to save the euro" speech back in July. This, too, is a good thing, says El-Erian.
That said, he thinks the decision to impose the levy against deposits is dangerous.