The Cyprus bailout

by on February 6, 2013 at 1:11 am in Current Affairs, Economics, Uncategorized | Permalink

No one wants to bail out Cyprus because it is “Greece with dodgy banks,” one third Russian depositors, a tax haven, corrupt, and the banking system is measured at eight times the size of the real economy.  Even a pro-bailout politician may not wish to soil the name of bailouts by handling this case.  The Germans are balking.

But if depositors take losses in Cyprus, what kind of precedent does this set?

One risky scenario is that it sets off a run on some of the weaker eurozone banks.

A better case scenario is that the market distinguishes Cyprus from the other cases (all of them?  some of them?) in the eurozone and European Union.  But that too involves a trick.  Let’s say the market can distinguish Cyprus from Spain.  Can the market also distinguish Greece from Spain?  Is it good to break the expectation of “we’re all in this together,” even when doing so is justified?

A systemically costless fail of credit obligations in Cyprus is itself risky.  It leads people to start wondering what else might be a systemically costless fail and testing that boundary.  (“If we let Greece go, maybe they’ll know we are still committed to Spain…”)  Which means a Cyprus fail might be systemically costly in the first place.

Developing…

Frederic Mari February 6, 2013 at 3:18 am

There are ways to handle the situation…

1- Russia might be very tempted to renew their help.

2- You can say Euro insurance of depositors apply… limited to the standard EUR 100,000, especially for non-Cypriot and/or for shell companies.

I suspect most people would accept that. Europe never promised more.

Andre February 6, 2013 at 3:39 am

Does anyone have a sense of how the Eurozone’s problems play out in Turkey? How happy must they be to have had Europe never seriously consider them for membership. This crisis on the other side of Cyprus must be quite amusing for them.

prior_approval February 6, 2013 at 3:43 am

Just as a note – the eurozone is not the EU, and nobody considered Turkey a candidate for the eurozone.

And Turkey would love to have the sort of trade/infrastructure benefits the EU offers.

Joan February 6, 2013 at 4:16 am

Turkish Cyprus is still much poorer. When you go from the west to the east side of Nicosia, suddenly streets are darker and dirtier and shops more scarce as soon as you cross the green line.

NK February 6, 2013 at 7:38 am

Their prime minister the other day said if they can’t get in (the EU) they’ll ask for Russia’s help to join the Asian thing (some trade union stuff). Whatever.

Yesterday I read that Germany does NOT object any more, so I think this topic is old…
Unfortunately I don’t remember where and any details since that was exactly what I expected.

prior_approval February 6, 2013 at 3:40 am

‘But if depositors take losses in Cyprus, what kind of precedent does this set?’

That the eurozone is serious about cracking down on dodgy money laundering/tax evasion havens, and has no real sympathy for either group of banking customers? (Switzerland, a much more ‘respectable’ address for such business, knows just what this is like – and they aren’t even a member of the EU/eurozone.)

Or that 17 billion euros, in the immortal word of the convicted former head of the Deutsche Bank, is ‘peanuts?’

Or that as noted in the comment above, deposit insurance is for 100,000 euros, and above that is depositor risk in ensuring their money is in a safe bank? (Looping back to the first point – there is no reason to wonder why so many people use Cyprus to handle their ‘special’ banking needs.)

‘Let’s say the market can distinguish Cyprus from Spain.’

Well, there is a reason that a certain subset of Spanish depositors bank in Cyprus, just like a certain subset of all the other eurozone customers of Cyprus’s banking industry. As this is likely to hurt exactly the sort of people that laws against money laundering, bribery/kickbacks, and tax evasion are supposed to effect, I’m pretty sure that for people aware of what Cyprus’s special role actually was (it isn’t going to be the new Switzerland, that is for certain at this point), an easy difference can be made between Cyprus, Greece, and Spain. After all, they were attempting to exploit it for their own gain – nobody is wearing glasses rose colored enough to not understand precisely why Cyprus was their preferred banking address.

Eurogeddon will not start in the flashpoint that Cyprus has been for decades – mainly because everyone (well, almost) aware of the fact that Cyprus is a banking hub knows what sort of role the banking industry in Cyprus plays.

Very Serious Sam February 6, 2013 at 3:41 am

As for the Spiegel text in which the chancellor candidate of the social democrats, Peer Seinbrück, sets ‘conditions’ that the SPD agrees to a Cyprus bail-out: this is just show.
The SPD agreed after some bickering to each and every bail-out (banks, countries) demanded by Merkel and will continue to do so.
The SPD herself even demanded to introduce euro-bonds to mutualize the existing and new debt of banks and other nations, may it cost the German taxpayer what it wants.

8 February 6, 2013 at 3:45 am

Why not give Cyprus to Russia?

affenkopf February 6, 2013 at 4:53 am

Then give Greece back to Turkey and you have half the problems of the eurozone solved.

Zombie February 6, 2013 at 7:29 am

And then what? Eastern Germany to the Russians?

Roy February 6, 2013 at 9:17 am

No we can give Greece to Russia too, they have always wanted the place.

dan1111 February 6, 2013 at 4:58 am

I’m pretty sure this sets an even worse precedent…

8 February 6, 2013 at 12:46 pm

Europe keeps Greece, it’s reparations for Constantinople. But it’s OK to move Greece into the Russian sphere of influence, they are all Orthodox. That way the Russians can be a total buffer against the Muslims and move their natural resources right into the Med. Win Win Win.

NAME REDACTED February 6, 2013 at 6:51 am

“But if depositors take losses in Cyprus, what kind of precedent does this set?”
A good one.

Zombie February 6, 2013 at 7:36 am

Is it really something new? This is exactly what happened in Iceland. Foreign depositors were not protected by the small Icelandic state.

NK February 6, 2013 at 7:40 am

Yes, and it’s great they did that, except that Cyprus is not a Euro-Ponzi state (yet), while Cyprus is and as such it’s going to require a CTRL+P by Hyper Mario.

Very Serious Sam February 6, 2013 at 7:55 am

“except that Cyprus is not a Euro-Ponzi state (yet), while Cyprus is” is not what you intended to write :)

Hazel Meade February 6, 2013 at 10:12 am

I’m not sure what ‘CTRL-P by Hyper Mario’ means either.

Eric February 6, 2013 at 9:59 am

And now wee know why living wills for large banks and the end of too big to fail is nonsense. Tyler Cowen is getting worried that the outside chance of a vaue possibility that letting some thing go might have bad consequences, so let’s just avoid the possibility. If an academic gets twitchy at this scenario, how do you expect a politician or bank regulator to react? Particularly given that academics will blast away if anything goes wrong.

Hazel Meade February 6, 2013 at 10:08 am

Well, in that case, I guess we had better bail out Zimbabwe.
Because if people know that we’re not commited to bailing out Zimbabwe, they might start thinking we’re not committed to bailing out Madagascar. Which might imply that we’re not going to bailout Cyprus.

prior_approval February 6, 2013 at 11:06 am

It is possible you are new here. Prof. Cowen has been calling for eurogeddon to happen for quite a while now, and some of us have been mocking for equally long, as it never happens.

Of course, some day, the euro will go the way of all other currencies – in the long run, all currencies are replaced. After all, most Europeans over a certain age in the eurozone have experienced at least 3 currencies in their lives, and those who are older than 18 have memories of at least two.

Zachary February 6, 2013 at 11:01 am

Uh oh… Does anyone else put any credence in the argument that uncertainty made the financial crisis worse? Remember when Bear Sterns was repackaged, then Lehman failed, and the AIG got bailed out? I seem to remember that discretionary policy working out poorly… Maybe Europe is different (Doubtful).

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