The crisis in Cyprus may be a storm in an economic teacup. But it has important lessons for much larger vessels, including the eurozone as a whole. Some of those lessons are encouraging. But others are disturbing. The eurozone remains stuck in a horrific mess.
Last week, in a desperate attempt to preserve its offshore banking model, the Cypriot government decided to impose losses on deposits of less than €100,000, the ceiling for deposit insurance in the eurozone. Not surprisingly, this idea went down well neither in Cyprus, nor anywhere else within the eurozone.
The current plan is closer to what one would wish to see in an orderly bank resolution. Laiki Bank is to be split into good and bad banks. Deposits of less than €100,000 in the bank and assets worth €9bn – the sum owed to the central bank as part of its liquidity support – will be transferred to Bank of Cyprus. The remainder will be wound down. Those with claims to deposits in excess of €100,000 will obtain whatever the value of the bad bank’s assets turns out to be.