Cyprus Synopsis

The Cyprus bailout crisis is retold this morning by Liz Alderman in a story, "Cypriots Feel Betrayed by the European Union," that focuses on an average Joe, Charalambos Alexandrou, who owns a roofing business, and his wife, Aliki Perganti, who works for a ceramics company. The contours of a standard narrative are taking shape. Cyprus joins the EU in 2004; the eurozone, in 2008. In doing so, it moves away from agriculture and manufacturing and refashions itself along the lines of Switzerland and Luxembourg as a strategic money hub uniquely situated to serve Europe, Asia and the Middle East. And the money flows in, creating a real estate boom. Then in 2010 the chickens come home to roost. Risky loans begin to default. The coup de grace is the haircut on Greek government bonds the Cypriot banks are forced to take as part of the troika engineered bailout of Greece. When it was Cyprus' turn to go hat in hand to the troika Germany made sure, because of an intelligence assessment that Cypriot banks were flush with ill-gotten Russian wealth, that any bailout would have to include a bail-in, a.k.a., inflicting pain and suffering on depositors. As Alderman says,

And with losses of up to 60 percent being imposed on deposit accounts above 100,000 euros at the Bank of Cyprus, [Charalambos Alexandrou] said, even many of his friends — not just Russian oligarchs — were losing big portions of savings they so diligently tucked away during the good years.

An unsigned editorial in today's Opinion section of the New York Times, "Cyprus Is Not an Exception," points out that in the eurozone it's not just Cyprus that has a banking sector that is at a large multiple of GDP; both Malta and Luxembourg have banking sectors that are larger than Cyprus':

Luxembourg and Malta, which have established themselves as tax havens serving big global corporations and the superrich, have banking systems that are even larger. Luxembourg’s bank assets are a staggering 22 times its gross domestic product, and Maltese bank assets clock in at eight times the size of its economy. 

Leaders of both countries have insisted that they should not be compared with Cyprus and that they expected European leaders to stand behind their governments and banks come what may. Speaking of his banking system, the finance minister of Luxembourg, Luc Frieden, said: “We want to expand it further, not to downsize it.” 

Banks in Luxembourg and Malta, many owned by big European and American financial firms, are healthier than those in Cyprus, according to the International Monetary Fund. But the I.M.F. raised concerns about the ability of the countries to properly monitor their banks or support them in a crisis. In other words, the euro zone and the I.M.F. would have to step in to bail them out if they ran into trouble. 

In any case, the euro zone needs urgently to finish work on a banking union that would allow the European Central Bank to supervise large banks instead of leaving that task to national policy makers who may be too protective of their banks. Europe should also have a common process to restructure troubled banks, which should reduce the risk of Cyprus-like debacles. A banking union would also give savers more confidence that their insured deposits are truly guaranteed, an assurance that was deeply shaken by what happened in Cyprus. 

Thankfully, the crowds were not as big and chaotic as people had feared when banks in Cyprus reopened last week after for two weeks — but only after the country imposed tough capital controls to prevent depositors from fleeing. Europeans may not be as lucky next time.

There seems to be a lot of clucking satisfaction from those who championed the view that Cyprus was a little one-off that so far there is no evidence of a run on banks. I say it's early yet. People are still in shock. Events are still unfolding in Italy. Give it some time.