Opinion » Gwynne Dyer

Cyprus Bank Robbery

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Could a failed bank robbery in Cyprus cause the collapse of the euro? It's hard to imagine how anything that happens in Cyprus, with less than one million people, could bring down the common currency shared by three hundred million Europeans, but there are few human behaviours as infectious as a run on the banks.

Strictly speaking, the Greek-Cypriots are not having a bank run, because their banks have all been closed since last Saturday and the cash machines will only give out 500 euros (about $650) per customer. But there would certainly be a nationwide bank run if they reopened the banks without strict limits on cash withdrawals and transfers overseas.

A financial disaster in remote Cyprus will not directly affect the fate of the rest of the European Union, but any suspicion that the bail-out of a EU country might involve the actual confiscation of money in people's bank accounts is financial and political dynamite. The terms of the Cyprus bail-out have just confirmed that suspicion.

The banks in Cyprus had certainly got too big for their boots. They had grown fat on the deposits of Russians, many of whom were using the island republic as "a gigantic washing machine" to launder illegal funds. And they had lent out far too much money, especially to Greek banks and companies: their loans amounted to eight times the entire country's national income.

Everything seemed all right until Greece's economy crashed and needed not one but two bail-outs. During the second one, last year, foreign investors holding Greek bonds were forced to take a "haircut:" they had to agree to a 70 per cent cut in the value of their holdings. That gave Greece a little relief, but it plunged the Greek-Cypriot banks into a nearly terminal crisis.

So now it was Cyprus's turn for a 17 billion euro bail-out — but this time it was not the bond-holders who got a "haircut;" it was the depositors.

Cyprus was ordered to raise 5.8 billion euros of the bail-out money itself. It was to do it by confiscating 6.75 per cent of the money in the savings accounts of everyone with less than 100,000 euros in their account, and 9.9 per cent of the money in all larger accounts. In most people's eyes, that is just straight theft. Worse yet, people in other EU countries realized the awful truth: EU bail-outs CAN cause bank runs.

If there's going to be a run on the banks, you want to be first at the counter. If you think there might be an EU bail-out for your country, you should get all your money out right away, just in case. And while Cyprus is too small to be significant, much bigger EU countries like Italy and Spain, with one-third of the eurozone's population, are also potential candidates for a bail-out. Bank runs in those countries could spell the end of the euro.

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