Once fear reaches a critical mass, people will act, and then a bank run becomes a self-perpetuating process. There has been a lot of complacency about the eurozone crisis in the past eight months.
Sir Mervyn King once said it was not rational to start a bank run but rational to participate in one once it has started. The governor of the Bank of England was right, of course. On Saturday morning, the finance ministers of the eurozone may well have started a bank run.
With the agreement on a depositor haircut for Cyprus – in all but name – the eurozone has effectively defaulted on a deposit insurance guarantee for bank deposits. That guarantee was given in 2008 after the collapse of Lehman Brothers. It consisted of a series of nationally co-ordinated guarantees. They wanted to make the political point that all savings are safe.
I am using the expressions "in all but name" and "effectively" because legally, Cyprus is not defaulting or imposing losses on depositors. The country is levying a tax of 6.75 per cent on deposits of up to €100,000, and a tax of 9.9 per cent above that threshold. Legally, this is a wealth tax. Economically, it is a haircut.