Cyprus bailout just raises stakes for next crisis

Due to the terrible mishandling of the Cyprus crisis, every option has been put on the table. When the next crisis strikes, people will have to expect anything

by Robin Shepherd, Owner / Publisher on 25 March 2013 07:00

So, finally, Cyprus, the EU and the IMF have managed to put a sticking plaster on the gaping wound that is the Cypriot economy. Maybe it will hold, maybe not. But the bigger issue was never a country whose GDP is only 0.2 percent of the eurozone total.

What always mattered much more was what it implied for the wider eurozone, especially for those countries slated as risky.

The top and bottom of the deal is that accounts from the two largest banks of over 100,000 euros will be frozen and then strafed to raise the 5.8 billion euros that Cyprus itself has to raise as part of the package -- the bail-in component of the overall bail-out. (No-one knows how much that will amount to, but there is talk of up to 40-50 percent losses for depositors.)

Plainly, that will unnerve wealthy investors with big accounts in countries such as Spain which have extremely precarious banking sectors. We will soon see if they will withdraw their funds quickly. If they do, that could make bank failure a self-fulfilling prophecy. But even if they don't, they are bound to be jumpy and ready to pull out their cash at the first sign of trouble. 

The most talked about precedent that has been set by the Cyprus crisis is that countries that run into trouble will now have to find money from their own resources. But there is another lesson that is just as important. Because the whole rescue package was so badly bungled, we now know that other options were put on the table and then formally proposed.

The first option, which in one form or another was being bandied around throughout the whole of last week, was that all, or nearly all, depositors would see their savings plundered. In other words, even though the plan that we now have focuses on funds over 100,000 euros in two banks, the first plan focused on funds of any level in any bank.

No-one's safe, and that is the ultimate lesson that the Cyprus affair has to teach to everyone else. When the next crisis in the eurozone crops up, it will therefore be much more difficult to resolve, and much more likely to cause panic.

Having said all that, Cyprus itself is far from out of the woods. Let's see what happens when the banks open tomorrow.

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