CYPRUS blinked! A bail-out designed to rescue Cyprus and keep it in the 17-nation eurozone badly backfired a fortnight ago. The European deal agreed to in the wee-hours of March 16 in fact “bailed-in” all bank insured and uninsured depositors alike of this Mediterranean midget (population: 800,000), with a gross domestic product (GDP) of only 18 billion euros or equivalent to less than 0.2% of eurozone's total output. The 9.9% tax levied on deposits exceeding 100,000 euros (European Union guarantee threshold) alienated Russia (one-third of total deposits held by its businesses and banks). The 6.75% tax on guaranteed deposits sparked such outrage that even when later sweetened with an exemption for deposits below 20,000 euros, the rescue was voted down 36-0 by Parliament on March 19.
Cyprus may be bankrupt, but this was a messy deal. Eight months after the European Central Bank (ECB) had managed to restore some semblance of stability by promising “to do whatever it takes” to save the euro, the risk of exit by a euro member returned. Indeed, it raised the chances of bank runs if Cyprus can grab your savings, why not Italy or Spain? It just reflects the lack of real progress towards a durable solution to euro's woes. I think it's wrong for the eurozone to even consider letting tiny Cyprus slide out so easily. Euro's stability must rest on its irreversibility. Already, eurozone is in recession. Protest parties are getting more popular and more aggressive again. The real surprise was the International Monetary Fund's (IMF) support for a “hair-cut” on guaranteed deposits a sure sign of double standards. The IIF (International Institute of Finance, representing the world's largest banks) calls the move an “incredibly dangerous precedent in that it broke with practices that depositors' savings were guaranteed.” In so doing, eurozone breaks its own financial system's last great taboo. The consequences can be toxic.
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