Cyprus and the Bail-In

Cyprus

One year after the claimed bail out in Cyprus, situation of that country still remains austere. One of European Union’s smallest nations was actually bailed in by their own people who, gave up their private savings and were forced tax on their deposits by the government. The tax conditions were 6.75 % for 100000 savings and ten percent for any thing higher, after corrupt banks and government institutions crumbled. The government imposed capital control on public bank accounts and this capital seizure is infamously known among Cypriots as “The Haircut” but, in all honesty it is a clean scalp shave.

Ensuing the bail in, this fun-loving Mediterranean island is struggling to stand back on its feet one year later. Its economy fell five percent in the last year and unemployment rocketed to seventeen percent and the heads of central banks  in Cyprus who undertook the bail out process last year quit this week after fall out with the government. For Euro Zone and IMF this Cyprus experiment turned out to be a disaster and a black mark on their credibility and future financial handling. Other bubble economies in Europe like Spain and Italy have since feared that Euro zone could hand them a similar fate.

To bail out Cyprus with their one billion euro financial assistance, these European institutions have demanded that the common people pay a too high price in return. The price of waking up to a lose of lifetime’s hard earned money. Cyprus has a lot of Greek culture and influence that go centuries and the financial crisis in Greece had an effect in their economic collapse. Experts claim, real estate bubble burst and banks irresponsible loans approvals also contributed significantly to this crisis. Government corruption also played a role in creating the mess.

Why then, did the European Union not step up the way it should have for a country that has been their sun bath vacation spot. Because, it is widely known that most of other Euro countries had very little financial investments in Cyprus and were not really interested in putting down their money to bail out a fellow nation. What many failed to mention is the fact that it was a political one too, those scandalous European powers put Cyprus on the line to prove a point to fellow Euro rivals and the rest of the world, who the boss was in Europe.

The German elections were round the corner and Chancellor. Merkel strategically choice not to help Cyprus, a country that has large Russian depositors whose funds are close to thirty percent of whole Cyprus deposits. So, in that sense Cyprus was that one-off case. The fundamental rules of any financial bail out are these: First, the share holders of those broken institution will loss all their investments, rightly as it is their business loss. Then if in need of more, the bond holders will bare the brunt. But, Cyprus is the only ever bail out in the world with a role reversal. The private savings of tax payers and uninsured depositors were robbed off their lifelong hard-earned bob in order to save those share and bond holders. An abject betrayal to the Cypriots and their government and practically, none of those one billion euros given by EU would the government or people ever see.

Dealing with bailouts is never a good experience but, Cyprus bail out disaster could teach a lot of lesson moving forward, interestingly an analyst for the economist put forth a three-step strategy. There should be a state-owned bank that could help the market by taking the bad loans of the restructured bank. Then, chaos could be prevented if the country adapts a procedure to distribute  the burden on longer term debts and finally, imposing strict liability rules can have an adverse effect on the market and flexibility of a worst case contingency plan could be useful in preventing financial collapses in the future. One year later, many in Cyprus remain optimistic as they say, just like they got over the slump in 1974 they could do it again.

Opinion By Vikas Vemuri

@vikvemuri

Sources

The Economist

Forbes

Euro Zone

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