A great image: economically sinking Cyprus surrounded by sharks. Posted on the front page of Economist with title “The euro-zone crisis: Just when you thought it was safe…”. Bailing out Cyprus was always going to be tricky. But it didn’t have to be like this, reads the subtitle.
“EVEN by the standards of European policymaking, the past week has been a disaster. In the early hours of March 16th, nine months after Cyprus first requested a bail-out, euro-zone finance ministers, led by the Germans, offered a €10 billion ($13 billion) deal, well short of the €17 billion needed. Who ordered whom to do precisely what is not clear, but the Cypriots then said they would raise a further €5.8 billion by imposing a levy on depositors—of 9.9% on savings above the €100,000 insurance-guarantee limit, and 6.75% for deposits below it. Chaos ensued, not least among the many Russians (reputable or not) who have parked their money in the lightly regulated island.
Towards Cyprussia?
Cyprus is broke. Its debt, if it took on its banks’ liabilities, would hit 145% of GDP. This newspaper suggested recapitalising Cypriot banks, on a case-by-case basis, directly through the European Stability Mechanism (ESM), thus breaking the vicious circle where weak sovereigns bail out weak banks. We also argued for depositors and senior bondholders to be spared—not out of any particular love for rich Russians, but because of the fear of bank runs in larger weak euro economies. The Europeans instead decided to lend the money directly to the Cypriot government; and the Cypriots, perhaps bullied by some creditors, then decided to clobber all the banks’ depositors, even the insured ones.
This was ingeniously loopy. Cyprus is odd, because virtually all its banks’ liabilities are deposits (as opposed to longer-term bonds).
The blame for this should be shared between Cyprus and its creditors. Cyprus is guilty of a lot. It welcomed in the Russians and allowed its banks to get far too big: their assets reached 800% of GDP in 2011. The banks were in trouble even before the restructuring of Greek government bonds opened up a €4 billion hole in their accounts last year. As for the creditors, Angela Merkel’s priority seems to have been to appear stern before the German election, and the European Central Bank, whose job it is to protect financial stability, was party to a scheme that ended up jeopardising it.
What should Europe’s leaders do now? The worst outcome would be to allow the Cypriots to slide towards the exit. That would be disastrous for the island. And the euro zone would be wrong to imagine that Cyprus is tiny enough to let go safely. The currency’s credibility rests on the idea that it is irreversible.
Leaving it to the Russians to save Cyprus, by letting them recapitalise its banks and grab a slice of its gas, is an answer, but not the best one. However tricky the politics of using German taxpayers’ money to bail out Russian depositors, a deal that ends up entrenching Cyprus’s status as an offshore Russian satrapy would be a perverse outcome. A revised deal with the euro zone would be better.
This newspaper would still prefer to recapitalise Cyprus’s banks directly through the ESM. That option is plainly not on the table. The best that can probably be done now is to spare the insured depositors, bail in other bank creditors and, given the economic damage caused in the past week, increase the amount of the bail-out.
(read full article The Economist)
politicans are the same everywhere[ it would appear] during the height of what we called ‘the celtic tiger] they were taking in 8b a year in houss tax the banks were lending money irresponsibly it is called a ‘bubble’ how could our leaders be expected to see this [ its only their job]