The crisis in
like it will be resolved with the equity holders, bond holders and holders
of large deposits (greater than $140k) in one bank being wiped out, and equity
and bond holders in another bank being forced to buy equity. The large depositers in the Bank of Cyprus
will exchange their bank accounts for stock, in effect being forced to invest in
the stock of the bank. Cyprus
Reality set in with respect to insured deposits, who will be kept whole. The legacy though is a bitter and fractured
and a distrust in the banking system that will take decades to restore. And when a banking system cannot function, an
economy cannot function as Europe will learn
in the coming months.
One of the really good economic columnists of the Financial Times, Wolfgang Munchau has it pretty much correct.
may agree, but the island state has got the best deal it was entitled to
expect. This was not the morality play rolling across media bulletins that
paint the country as an innocent victim of European highhandedness. It chose a
high-risk strategy of living off a banking system far bigger than the state could
support. Two years after Cyprus Nicosia lost market
access, the banks still have books seven times ’s annual economic output.
Even proportionately small losses are unaffordable for the state to make good. Cyprus
got the best deal it could and Cyprus
The relative victors are small depositors, who faced an unconscionable haircut, and non-financial business which was spared much worse chaos in a euro exit.
Europe arrived at
this solution the first time, much of the damage could have been
avoided. But German insistence on
punishing the people of Cyprus,
an insistence motivated by domestic German politics made a problem into a
crisis. And the problem created by the
inept crisis management is just beginning.
What a bunch of idiots.