In civilized societies with a constitution, law enforcement is often frustrated with it as on occasion it not only protects the good guys but it also provides a shield for the bad ones. This hurdle we put on law enforcement is nothing but the price to pay for civility and democracy. You shield the bad guys to make sure that law enforcement constantly justifies itself and its methods thus staying honest.
Banking is somewhat similar. When you bail out banks you try to not bail in depositors regardless of who those are. The reason you do this is so that the good guys will trust your banking institutions. The good guys need to know there are rules and that the game is not rigged. The reason there are taboos, the reason why there are things you NEVER do, is that nothing is “one-off”. As soon as “never” and “once” are put next to each other you have two options and the number two is bad news. It kills trust and introduces second guessing. Bank runs are made of one-off false promises.
This weekend (a long weekend in the Greek orthodox universe) the EU showed us what their price of trust is: it takes a small island which cannot put up a fight and a large number of Russian depositors to replace “never” with “one-off”. The problem is that once you quantified trust everybody does their own trust calculus: who is to say that it won’t happen elsewhere soon, today, perhaps Spain, Italy, Greece?
Rumor has it that the ECB (fearing contagion they did not anticipate?) sent an emergency team on Cyprus over the weekend trying to convince the Cypriot government to accelerate the deal. The government is stalling because with its fragile 29 to 56 parliamentary majority they don’t have the votes to pass the measure. Rumors also say that Monday will not be enough to shield this coup from bank runs and that Tuesday and Wednesday the banks will remain closed. The week ahead is going to be interesting starting with Asian markets this early morning. If we don’t have massive bank runs we could see a quiet intensified flow of funds from crisis countries to the Euro core which would worsen an already tense situation.