The Politics of Moral Hazard

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It is an old and never-ending contest. On one side are themoral-hazard scolds, claiming that one of the major responsibilitiesconfronting policymakers is to establish incentives that demonstrate thatimprudent behavior does not pay. On the other side are the partisans offinancial stability, for whom confidence in the financial system is tooprecious to be endangered, even with the best possible intentions.
Cyprus is the latest battleground between the two camps. OnMarch 25, after the decision had been taken to wind up the country’s second-largest bank, and toimpose large losses on uninsured depositors in the process, Eurogroup PresidentJeroen Dijsselbloem, the Dutch finance minister, declared that a healthyfinancial sector requires that “where you take on the risks, you must deal withthem.” The aim, he added, should be to create an environment in which Europe’sfinance ministers “never need to consider a direct recapitalization” of a bankby the European Stability Mechanism. He was apparently reading from a textbookon moral hazard.
Immediately after this declaration, however, prices ofEuropean bank stocks plunged, and Dijsselbloem was accused by many (includingsome of his colleagues) of having poured oil on a burning fire. Within hours, he issued astatement indicating that “Cyprus is a specific case with exceptionalchallenges,” and that “no templates are used” in the approach to the Europeancrisis.
This is not convincing. Markets learn from a current crisiswhich principles will be applied in the next one. And letting them learn isprecisely what the fight against moral hazard is about.
European policymakers have been agonizing over the samedilemma throughout the Cyprus crisis. The burden of bailing out the country’sailing financial institutions was too heavy for an already-indebted Cypriotstate, and the International Monetary Fund was adamant that it would not pretend otherwise. So,in mid-March, Cyprus was heading for a precipitous retrenchment of its bankingsystem, resulting in the loss of a very large part of the country’s financialwealth. For the IMF and Germany, which pushed for such an outcome, therationale was the need to prevent moral hazard.
Cypriot President Nicos Anastasiades, reportedly with somesupport from European institutions, desperately tried to avoid this fate – inthe name of financial stability. The solution found during the night of March15 – a one-time tax on deposits – was defensible from the Cypriot viewpoint.Preserving domestic financial stability required limiting taxation of largedeposits, because a substantial proportion belonged to foreign account-holders.Avoiding a massive withdrawal of foreign capital therefore implied taxing alldeposits below the

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关键词：MORAL HAZARD Politics politic hazard moral major possible between system

It is an old and never-ending contest. On one side are themoral-hazard scolds,claiming that one of the major responsibilities confronting policymakers is toestablish incentives that demonstrate that imprudent behavior does not pay. Onthe other side are the partisans of financial stability, for whom confidence inthe financial system is too precious to be endangered, even with the bestpossible intentions.

Cyprus is the latest battleground between the twocamps.
The obvious way out of this dilemma would have beenfor Cyprus’s eurozone partners to assume the cost of the tax on deposits below

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