Cyprus’ Bank Bail-In and -Out: The Euro Crisis Exits the Danger Zone, Goes Where Dragons Be

South-Park-And-Its-Gone-Meme

Over the weekend, the Euro’s ongoing crisis crossed into a new dimension, one that I don’t think anyone ever saw coming. While most of the attention has been focused on the so-called PIIGS (or the GIPSIs, if you want to be edgy about it), shit had quietly been hitting the fan off the southern shore of Turkey in tiny little Cyprus. With a population of less than a million and a GDP of just $24 billion, Cyprus isn’t actually supposed to matter — and in a sane world, it wouldn’t. But we don’t live in a sane world, we live in this one, and because someone thought it was a good idea to let this island nation that has more in common with Bosnia (it’s been partitioned in two since a dust-up between the Greeks and Turks in 1974) than a North European Social Democracy and is used as an offshore haven by countless Russians (and more than a few Brits) into the Euro. Because of that, Cyprus matters. A lot.

Because it was used as an offshore haven, Cyprus’ financial sector grew to be far bigger than the country’s GDP. As with the afore-mentioned PIIGS, this sector fell victim to the fallout from the Great Recession and despite a Russian loan and other measures, now needs a bailout (or so they say). But like Iceland in 2008, the Cypriot government doesn’t have enough money. Unlike Iceland, Cyprus can’t just let the whole thing be drowned, and not just because the main creditors of its banks are unfriendly Russians instead of Britons and Dutch looking to get a couple extra percent on their savings (though that is actually quite relevant). The main reason why is because Cyprus is in the Euro and thus its fate is tied to the fates of Germany, France, Spain, et al.

Why isn’t Cyrpus just getting a check from the ECB in exchange for some “austerity measures” like Greece or Portugal before it? Simple: there’s an election in a few months in Germany and nobody wants to bail-out anyone else, especially the aforementioned unfriendly Russians. The money still has to come from somewhere and so a plan B was devised: Cypriot account holders get “bailed in” via a confiscatory levy on their accounts (in exchange for their money, they’d get some worthless stake in their bank and possibly a gas voucher) to the tune of 6.75% on accounts of under 100,000 euro — this is the important figure because 100,000 is the threshold for Cyprus’ deposit insurance (their equivalent of the FDIC) — and 9.99% on accounts above that threshold. Naturally, as soon as people heard of this scheme, they lost their minds, in large part because their deposits are supposed to be insured by the government and are thus risk-free.

The various developments since then don’t actually matter because the symbolic dam has been broken by the violation of the trust in the government bank insurance scheme in a country that hasn’t been written off as a corrupt banana republic, mainly because it’s part of a currency union of “trustworthy” countries. Now, you’ve got a breach of the trust in deposit insurance schemes not just in Cyprus, but in the entire Eurozone and possibly the entire “developed” world. After all, if the government can take 6.75 euros out of every 100 in Cyrpus, it can do so in Italy, or Spain, or any other crisis-hit nation.

Side-effects didn’t begin to kick-in right away. The euro slid only modestly against other currencies, partly because Cyprus extended its bank holiday because parliament wasn’t able to pass the bail-in bill (the immediate emptying of ATMs and spreading protests likely had an impact), but don’t be surprised to see people start to freak out in other euro-zone nations at the first sign of trouble in the future because the Euro crisis found the end of the Danger Zone, but that end is labeled on the map only as “there be dragons.” Due to the entrace into this forbidden land, the unshaking and unwavering trust and faith in government deposit insurance schemes, and thus banks as a whole, well, as was so eloquently put inĀ the brilliant “Margaritaville” episode of South Park…it’s gone.

In case you’re still confused, this London cabby will explain it for you. Just hide the children before you press play: