The Cyprus Bank Bailout Could Be A Disastrous Precedent: They’re Reneging On Government Deposit Insurance
There’s a little detail in the just announced bailout of the Cypriot banks (and Cypriot economy as a whole) that could be setting an entirely disastrous precedent for the entire European banking system. Please note the “could be” here, it depends upon how people react next.
That Cyprus and its banks need bailing out is beyond doubt. The banking sector is absolutely vast as compared to the size of the economy (largely as a result of a couple of decades of use as a secure location for Russian deposits) and the banks are indeed bust. Largely because they were heavily invested in Greek Government bonds which then, as we all know, suffered two substantial haircuts.
So, something needed to be done. And something has been done. More money is being sent in to recapitalise the banks, Cypriot loans are being rescheduled, the government will sell off assets to help plug the gap and so on. However, there is this one further detail that could have seriously bad effects: