“It became necessary to destroy Cyprus to save it”

By Peter Hoskin
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Huzzah! Cyprus has been saved! Eurozone finance ministers announced last night that they had agreed on a €10 billion bailout deal for the stricken island. The main feature of the package is the death of a bank: Laiki, the country’s second-biggest bank, will be divided into “good” and “bad” parts, with the former eventually being merged into the larger Bank of Cyprus. Deposits under €100,000 will be guaranteed. But any uninsured deposits over that sum will be hit to the collective sum of €4.2 billion. This is being reported as a strike on mega-rich Russians with Cypriot bank accounts, but is that wholly true? I’d like to hear more about the affected parties before reaching conclusions.

In any case, this is, to some extent, positive news for everyday savers in Cyprus. Their money has been spared – and so has the Bank of Cyprus, the survival of which was not always certain. And it’s good news, too, for the Eurocrats, for three main reasons. First, as most of the pain is being suffered by individuals, it’s a deal that’s likely to be politically acceptable in countries such as Germany. Second, for a similar reason, there is unlikely to be market panic across Europe about the idea of further expensive bailouts. And third, all this has been achieved without taking Cyprus out of the currency union, which – although it may not have had much effect by itself – could have raised the prospect of wider break-up. The euro staggers on.

But is it all a good news story? Hmm, perhaps not. As Pawel Morski explained in an excellent post on Saturday:

“There are four shocks happening at once; the bog-standard austerity shock; the trauma of bank withdrawal controls; the wealth shock; and the structural shock of wiping out the financial sector. The bailout bill is certainly going to get a lot higher too, as a larger amount of debt is piled onto a smaller economy.”

All of which means that Cyprus and its people face years of financial grief. It reminds me of what a US major is supposed to have said about Ben Tre during the Vietnam War: “It became necessary to destroy the town to save it” – except, from the perspective of Brussels, Cyprus may not even have been saved. There’s still the possibility that the country will voluntarily leave the Eurozone in order to do what Daniel Hannan recommends: devalue its way to growth.