The Global Economy in Turbulent Times

CHAPTER 56 Cyprus’s Bailout Turns Bail-In¹

Cyprus blinked! A bailout designed to rescue Cyprus and keep it in the 17-nation eurozone badly backfired a fortnight ago toward the third week of March 2013. The European deal agreed to in the wee hours of March 16 in fact “bailed-in” all bank-insured and uninsured depositors alike of this Mediterranean midget (population: 800,000), with a gross domestic product (GDP) of only €18 billion—equivalent to less than 0.2 percent of eurozone’s total output. The 9.9 percent tax levied on deposits exceeding €100,000 (European Union [EU] guarantee threshold) alienated Russia (one-third of total deposits held by its businesses and banks). The 6.75 percent tax on guaranteed deposits sparked such outrage that even when later sweetened with an exemption for deposits below €20,000, the rescue was voted down 36–0 by Parliament on March 19.

Cyprus may be bankrupt, but this was a messy deal. Eight months after the European Central Bank (ECB) had managed to restore some semblance of stability by promising “to do whatever it takes” to save the euro, the risk of exit by a euro member returned. Indeed, it raised the chances of bank runs—if Cyprus can grab your savings, why not Italy or Spain? It just reflects the lack of real progress toward a durable solution to euro’s woes. I think it’s wrong for the eurozone to even consider letting tiny Cyprus slide out so easily. Euro’s stability must rest on its irreversibility. Already, eurozone is in recession. ...