A bailout for Cyprus

Cyprus was saved from financial catastrophe this week after European leaders agreed on a bailout package intended to keep the island nation in the euro zone and rescue its debt-addled economy. In return for the $13 billion loan, Cyprus agreed to shut its second biggest bank, Laiki, and tax large bank deposits—many of which belong to wealthy Russians who have squirreled away cash in the Mediterranean tax haven. An earlier deal collapsed last week when ordinary Cypriots protested a proposed tax on even small, insured deposits. It is thought that depositors with more than $130,000 in Cypriot accounts could lose as much as 35 percent of their savings.

This bailout still means pain for Cyprus, said Matthew Yglesias in Slate.com.Even if nothing goes wrong, the island’s main high-value industry—offshore banking—has been destroyed and huge stores of local wealth have evaporated. The deep recession, or even depression, that is about to hit the tiny country will “be sufficient to make problems for Cyprus’s remaining banks even if everything else goes fine.”

At least that pain is now being fairly distributed, said the Financial Times in an editorial. For the first time, bank investors are being punished for their poor choices, instead of simply being bailed out by innocent European taxpayers. If future European bailouts follow this precedent, “the euro zone banking system faces a better prospect of being cured than in a long time.” The market will scrutinize banks to distinguish the strong from the weak, and investors “who manage risks well will be rewarded.”

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All this bailout achieves is more confusion, said The Washington Post. Before Cyprus, European depositors were told their accounts were sacrosanct; now they’re subject to confiscation. Such chaos is to be expected in a currency union that lacks “the usual political, legal, and regulatory infrastructure.” Until a better framework is in place,“Europe’s policymakers will continue to make it up as they go along. For better or worse, investor confidence will develop accordingly.”