The Cyprus Bailout Disaster

Cyprus ATM 400x266 The Cyprus Bailout DisasterWhat has clearly, and for good reason, become the news of the day, is the unprecedented tax on Cypriot bank deposits agreed to by Euro-area finance ministers as officials unveiled a 10 billion-euro ($13 billion) rescue plan for the country.

Cyprus will impose a levy of 6.75% on bank deposits of less than 100,000 euros — the ceiling for European Union account insurance — and 9.9% above that. The levies are expected to raise 5.8 billion euros, with the eurozone, International Monetary Fund, and junior bondholders picking up the remainder. So the bailout is actually more of a bail-in.

The announcement was, of course, made late last night while markets were closed. The bailout raises a number of very frightening questions, notably regarding that the grander problem here is less in the resulting and inevitable Cyprus mess that is to come and primarily pertaining to the moral precedent that has been set.

This wasn’t the first bailout in the eurozone and it won’t be the last. But opting to place the bailout burden, by force, on your own citizens in this manner is terrible for future economic growth and for the confidence of your nation’s people to keep their money in the banks. It should come as no surprise that Cyprus residents have been milking the ATMs for all they can right now.

What does this mean for residents of other peripheral nations of the eurozone? Surely those who may consider themselves in unstable areas will move cash under their mattress as well.

And the worst part of all this is that it is very unlikely to be a one and done. Not even taking into account the other struggling eurozone nations, this won’t even be the last bailout for Cyprus, whose debt will probably catch up to them in not so many years from now.

Perhaps the focus should be more about how to begin getting nations to exit the euro and less about writing the bailout check of the day.

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