European financial crisis: The dangers of Cyprus' bailout plan

Cyprus is on tap for a $13 billion bailout from the European Union, but the financial lifeline comes with some pretty onerous strings attached. For the first time in the rolling European financial crisis, ordinary bank depositors are being asked to pony up, with a combined $7.5 billion in one-time taxes on their savings accounts. (Everyone would see their savings hit with a 6.75 percent tax, and larger deposits would be taxed at nearly 10 percent.)

President Nicos Anastasiades, inaugurated in late February, is urging Cypriot lawmakers to approve the bailout package, saying Sunday that failure to do so could lead to "a complete collapse of the banking sector," and could even force the divided island nation from the eurozone. Early Monday, parliament balked for a second time, putting off any vote until Tuesday afternoon, although that could easily drag on until Friday. In the meantime, Cyprus extended an order closing all banks in the country until at least Friday, to prevent a bank run.

Cypriots, it seems, are not the only ones unhappy with the bailout's terms. Stocks across Europe and much of the rest of the world were sharply lower Monday, as investors digested the possibility of Cyprus going under — and similar unpopular bank-depositor taxes for other struggling European nations, like Spain and Italy.

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For this to work, everybody — especially Europeans with bank accounts and investors in European sovereign bonds — will have to be "hypnotized into thinking that Cyprus really is unique," says Kevin Drum at Mother Jones.

Still, there are problems with this gambit, says Megan McArdle at The Daily Beast. First, "Europe seems to be chock full of unique, one time problems with its banking system," so it wouldn't be unreasonable for leery investors to "decide that they'd rather not stick around to see what one-of-a-kind, custom-crafted solution the European ministers come up with next." Then there's the "extremely foolish" decision to ding deposits below 100,000 euros — which are supposed to be insured under Cyprus law (think: FDIC).

Indeed, says The Wall Street Journal in an editorial, this deal is "an instant classic of euro-crisis dysfunction."

President Anastasiades will come in for a lot of criticism over this deal — he swore in his inauguration that "absolutely no reference to a haircut on public debt or deposits will be tolerated," after all, says the Cyprus Mail in an editorial. But "it is obvious from the statements made that Anastasiades was blackmailed into accepting" the deal, and things would be worse for Cypriot depositors if the banks collapsed, which they will surely do without a bailout.