Cyprus – a stark warning to EU nations

The great habit of saving has always been encouraged all over the world. But as it turns out, the habit may not be as great as it has been touted, if it’s been kept in one of the ailing banks in Cyprus.
In a first-of-its-kind bailout for a eurozone member economy, the island economy received €10bn in bailout funds from the European Union, but had to pay a pretty hefty price in return. Actually, large depositors in Cypriot banks had to pay this price, with a haircut of 37.5 percent slapped on their uninsured deposits in exchange for EU’s help.
“Depositors with more than €100,000 in Bank of Cyprus are set to get shares in the bank in exchange for at least 37.5 percent of their uninsured deposits, while a further 22.5 percent of their deposits will be put into a special fund attracting no interest and could see further write offs,” explained the Financial Times.
And this wasn’t the only condition. Other capital controls were also imposed on Cypriots, such as not being able to withdraw more than €300 in cash per day from each bank where they hold an account, business transactions limited to €5,000 per day, credit card transactions limited to €5,000 per month, and not more than €1,000 to be taken out of the country by travelers per trip.
IMF economists and the EU are critical of Cypriot banks, in particular the Bank of Cyprus, having taken up colossal risks for a banking sector seven times the size of the economy. The banks indulged in troubled Greek bonds at a time when other European nations were shying away, hoping that the ensuing loss will be less than market expectations.
Needless to say, the strategy was a significantly risky one, saddling the banks with huge losses in 2012 when Greek bonds were written off by 75 percent. Naturally, with the banks still struggling under the huge losses, the government alone couldn’t save a sector bigger than the economy.
But what’s really stirred up the world about this bank restructure deal is the warning that it carries for other eurozone economies. Countries like Malta and Luxembourg, with banking sectors much bigger than the respective economies, have been prompting concerns, while troubled financial sectors of larger economies like Italy and Spain aggravate those concerns even more.
No matter how draconian the bailout conditions may seem, given how often eurozone troubles have been coming up lately, an iron fist on EU economies is probably a good idea.