To the growing list of European countries that have suffered a major financial crisis in the past two years, add the tiny island nation of Cyprus.
The debt-ridden Cypriot economy nearly collapsed last year beneath the weight of an oversized and overextended banking sector. As in Ireland, Greece, Portugal, and Spain, Cypriot taxpayers will be forced to bail out failing banks through the interest paid on an €10 billion emergency loan from the so-called Troika—the International Monetary Fund, the EU and the European Central Bank.
But the bailout comes with some pretty harsh terms attached. Cyprus must make depositors help stabilize its national finances. In this fast-moving story, Reuters reported on April 2 that "Cyprus Popular Bank, parent of Laiki, is being wound down. Depositors with savings of more than €100,000 at Cyprus Popular Bank and Bank of Cyprus held at Cypriot branches will lose at least 30 to 40 percent to help pay for the bailout." Smaller deposits will be transferred to the Bank of Cyprus, the largest Cypriot bank, where uninsured deposits of more than €100,000 will be subject to a large levy.
This represents a significant shift in the European approach to financial bailouts, which have traditionally shielded depositors from restructuring plans. The shift seems all but certain to guarantee long-term financial pain for the rapidly shrinking Cypriot economy. It could also have a troubling impact on deposit trends in the larger Eurozone economy. Large depositors will likely "flee to safety" in the offshore financial centers of Dubai, Singapore, and the Cayman Islands.
Capital controls are in place in Cyprus to keep people from emptying their accounts. But that won’t prevent future depositors from stashing their money elsewhere or opting out of the banking system entirely.
What do you think? Should taxpayers be asked to bear the full burden of recapitalizing insolvent banks? Or should individual depositors pick up part of the tab?
For more information see:
"Laiki UK depositors won't pay Cyprus bailout levy," Reuters, April 2, 2013
"Bank of Cyprus depositors could lose up to 60% of their savings," The Guardian, March 30, 2012
Andrew Higgins, "As Banks in Cyprus Falter, Other Tax Havens Step In," The New York Times, March 31, 2013
"Cyprus bailout: Finance Minister Michalis Sarris quits," BBC News, April 2, 2013