Cyprus, Why Now? Follow The Money
Authored by Steve Hanke of the Cato Institute,
While the Cypriot Parliament may be dragging its feet on a proposed rescue plan for Cyprus' banks, the country ultimately faces a choice between Brussels' bitter pill... and bankruptcy. Cyprus' newly-elected President, Nicos Anastasiades, has quite accurately summed up the situation:
"A disorderly bankruptcy would have forced us to leave the euro and forced a devaluation."
Yes, Brussels and the IMF have finally decided to come to the aid of the tiny island, which accounts for just 0.2% of European output -- to the tune of roughly $13 Billion. But, this bailout is different. Indeed, the term "bail-in" has emerged, a reference to the fact that EU-IMF aid is conditional upon Cyprus imposing a hefty tax on its depositors. Not surprisingly, the Cypriots, among others, are less than pleased about this so-called "haircut".
Still, the question lingers: Why now? The sorry state of Cyprus' banking system is certainly no secret. What's more, the IMF has supported a "bail-in" solution for some time. So, why has the EU only recently decided to pull the trigger on a Cyprus rescue plan?
One reason can be found by taking a look at the composition of Cyprus' bank deposits...
There are three main take-aways from this chart:
1. European depositors' money began to flow out of Cyprus' banks back in 2010.
2. Indeed, most European depositors have already found the exit door.
3. Over that same period, non-Europeans (read: Russians) have increased their Cypriot exposure.
If the proposed haircut goes through, Russian depositors could lose up
to $3 billion. No wonder Vladimir Putin is up in arms about the bail-in. Perhaps a different "red telephone" from Moscow will be ringing in Brussels soon.
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