Photo: Yahoo Finance
Mohamed El-Erian – CEO of PIMCO, the biggest bond fund in the world – is out with a reaction in the FT to this weekend’s stunning Cyprus bailout deal.(The terms of the deal include an instant, 10-per cent “tax” on deposits held in Cypriot banks before the banks re-open this week, which is being widely-panned as unfair by critics.)
According to El-Erian, the EU actually 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.
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