Economist Slams The Cyprus Bailout - Business Insider

The Economists's "Schumpeter" blog has a big takedown of the surprise bailout of Cyprus, which involves bank depositors being subject to an instant levy on all of their savings to raise money.

Their title:?The Cyprus Bail-out: Unfair, short-sighted and self-defeating.

The post calls the bailout a "failure" for imposing a 10 percent deposit tax on those with over 100K euros in the bank and a 6.75 percent tax on those below that threshold.

They cite three big reasons why this is a bad move.

• This reintroduces contagion risk. Will depositors in other peripheral banks worry about the same type of haircut in the future?
• Fairness. Why do Cypriot widowers have to take a hit?
• Strategic. Europe has been doing well calming down the crisis thanks to the ECB's largess. This has just been undermined.

A lot of people will be wondering about the first point, the idea of contagion: Will depositors in another country worry about something similar happening?

It's going to be discussed, but leaders from the EU and IMF made pains to say this is a one-off due to special circumstances. The special circumstances involve the large size of the banking system (relative to GDP) and the fact that Cyprus houses a lot of Russian offshore money, which the rest of Europe was not eager to bail out. This isn't the case in other countries.

The last point about strategy is interesting. Things had been going pretty calmly in Europe for several months based on, let's face it, a big ECB free money backstop. Now we're getting back to loss-taking, which may be necessary at times, but certainly disrupts the flow.

Source: http://www.businessinsider.com/economist-slams-the-cyprus-bailout-2013-3

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