EU, IMF should reverse course on Cyprus bailout

Cyprus last week became the fifth eurozone country to get a bailout to save its banks. But the rescue package, which includes a tax on the bank deposits of ordinary Cypriots, risks destabilizing the entire continent’s banks and should be revised.

The tiny island nation ran into trouble because Cypriot banks are heavily exposed to Greek debt. With their $13 billion bailout, the EU’s finance ministers and International Monetary Fund no doubt hoped to contain this most recent threat to the euro.

Cyprus’s banks are valued at about 13 times the size of the country’s GDP, making a national bailout impossible. Still, setting this new precedent, in which citizens pay for bank rescues up front through a levy on deposits, is inviting a bank run Thursday, when Cyprus is expected to reopen banks. Already, ATMs across the island have run out of money.


Beyond Cyprus, however, the plan presents a new challenge to other faltering European economies, such as Spain and Italy; depositors may well steer clear of banks in those countries in fear that, should a bailout be necessary, the EU will hit them with a tax. The whole imbroglio highlights the concern that the EU still has no standard approach for dealing with financial crises. Previous bailouts have been financed by taxpayers.

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But EU officials are adamant that Cyprus is a unique case. Behind the proposed solution is a reluctance to prop up a banking system that is seen by many in Europe as a haven for Russian money, at least some of it from dubious origins. That can be seen in the deal’s details, under which a 9.9-percent tax will be charged on accounts over $130,000. Foreign deposits at the end of last year made up about $35 billion, a little less than half of all deposits in Cyprus.

Nonetheless, accounts under $130,000, which are protected under deposit insurance, will be charged 6.75 percent as well. Not surprisingly, Cypriots are outraged by this provision, and its parliament rejected the proposal bailout late Tuesday.

The most obvious compromise would be a new plan that protected those insured accounts, although the bill rejected by Cyprus’s lawmakers already exempted accounts with savings under $25,860. Plus, that wouldn’t solve the issue of savers across southern Europe looking at their own accounts and wondering if they are as safe as they thought.

A better way forward would be for the EU to change course and extend to Cyprus a bailout package similar to those offered to Ireland, Portugal, and Greece. The EU would have to forgo the $7.6 billion the deposit tax would yield, but the ensuing reassurances would more than make up the difference. Better to take a relatively small hit on Cyprus than risk further destabilization of Spain, Italy, and other eurozone economies.