Well, maybe you woke up Monday morning to find the world's financial system in complete chaos. I sure hope not.
Kevin Drum has the clearest explanation you will find:
Cyprus was basically an offshore banking haven for Russian plutocrats, so it grew to gargantuan proportions compared to the size of the country. If it had failed, the entire country would have imploded. That's bad. On the other hand, no one really felt like spending a trainload of EU taxpayer money to prop up a bunch of Russian oligarchs. That would be bad too. So the EU's politicos wanted to make the oligarchs pay a price for being rescued.
How about, say, a one-time tax of 10 percent of their deposits? Sold! But then the EU went further, imposing a one-time tax of 6.75 percent even on small accounts. Small insured accounts. This means that having an insured bank account no longer means bupkis in the EU. [My emphasis.]
So now the question becomes: Is Cyprus unique? Or, more precisely, can ordinary depositors and big investors be persuaded that Cyprus is unique? Because if they can't, then they're going to start pulling their money out of Spanish and Greek and Italian and Portuguese banks. And that would be very, very bad. It would turn the slow-motion bank runs of the past few years into the honest-to-God, high-speed, economy-ruining kind of bank runs.
And it all depends on whether everyone can be hypnotized into thinking that Cyprus really is unique. Tune in tomorrow to find out.The NY Times updates:
On Sunday, it was clear that a majority of Cyprus’s 56 lawmakers would not approve the terms of the bailout, which would lead to a likely loss of the rescue money that Cyprus so desperately needs.
The government extended a bank holiday it had imposed over the weekend, meaning banks will not open Tuesday as planned. There was talk that they might not open Wednesday, either.
...[I]t is one thing to wipe out bond investors and quite another to force a loss on bank depositors, including Cypriot savers who had their deposits insured and, like people all over the world, had the impression that a government-backed savings account was inviolable.
This is the first time depositors have taken a loss in a euro-zone rescue, said Adam Lerrick, a sovereign debt expert at the American Enterprise Institute, who has long argued that debt-heavy countries in Europe must make private investors, including bank depositors if need be, share the cost of bank bailouts. “It prevented the insolvency from being transferred from the banking system to the government,” he said.
While such a notion may please the financial hard-liners, it carries significant financial risks.
Haven't I heard this story somewhere before?Indeed, as many stunned Cypriots rushed to A.T.M.’s to remove their savings, Europe had to confront the prospect that savers in Spain and particularly in Italy — where cash-poor banks have been hit hard by loan losses — would do the same.