Financial Crisis Word Games: Replace Greece With Cyprus

The doors of the banks in Cyprus shuttered – and will remain closed until Thursday. The action is part of an effort to buy time before a crucial vote in the Cypriot Parliament on a controversial proposal to compel bank depositors to pay a portion of the cost of an international bailout.

European Central Bank Member: Cyprus Is Unique
Sound familiar? It might be easy to take any article today, hit global replace and insert “Cyprus” anywhere “Greece” occurred one month ago.

According to The European Central Bank member Joerg Asmussen, the situation in Cyprus is not another Greece. “I do believe that the situation of Cyprus and the Cypriot banking sector is indeed unique,” Asmussen told a panel discussion, according to Reuters.

It is also an attempt to calm the citizens, who are growing more opposed to the measure. Delaying the vote is unlikely to avoid the inevitable – a rejection by the Parliament of the international bailout package.

EU Shows Flexibility, Backs Small Saver Exemption
On Tuesday, Cyprus’s government tried to push an exemption for small savers as a means to win parliamentary backing and avoid default and a banking collapse. The European Union has expressed its support for exempting small savers, a sign that they are willing to show a little flexibility.

According to the Wall Street Journal, those who have saved less than about $26,000 in their bank accounts will pay no levy.

That flexibility is understandable to analysts who apportion some of the blame for the current crisis to decisions made by the EU.

What Happens In Cyprus Will Not Stay In Cyprus
Unless the US gets directly involved, damage from the crisis in Cyprus could be limited. But this does not mean the economy will not be impacted. As nations have learned throughout the financial crisis that began in 2009, in a global economy, the benefits and the pains ripple throughout the syste,.

In simple terms, Henry Blodget writes, if Europe experiences the economic equivalent of a heart attack that “wouldn’t be good for the U.S. economy” because it could “conceivably precipitate a run on weak European banks.”

“And a run on weak European banks could hammer the European economy and then the economy of Europe’s trading partners. And it could cause global markets to crash,” Blodget warns.

Political Weakness Contributed To Crisis, Say Analysts
“That left the depositors to make sacrifices. eurozone leaders were well aware that forcing losses on depositors of struggling banks would increase the risk of bank runs in other troubled countries if the public started to lose confidence in their finances. Yet they saw no other politically feasible solution, so they tried to be clever. They chose to impose a uniform tax on depositors of all banks, rather than a haircut related to the size of each bank’s losses,” says Douglas Elliott of the Brookings Institution.

Why is the EU willing to take such a risk in Cyprus?
It is conceivable that European leaders could have sold one more bailout to their voters using the argument that the alternative was “risking a European bank-run that eventually leads to bank failures back home. But  the likely reaction would have been even more voter anger and incomprehension,” argues The Financial Times’ Gideon Rachman.

So why did not choose not to do so? Rachman sees one reason.

“The answer is that they too are out of credit – political credit. This credit shortfall takes different forms in northern and southern Europe. For leaders of nations such as Germany, the Netherlands and Finland, there was a  sense that their voters and parliaments just would not approve another bailout – unless heavy penalties were attached,” believes Rachman.

Forbes magazine has a useful primer on the situation in Cyprus.

 

 

 

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