The Bitter Lemons of Cyprus

The Euro-crisis has reached a new level.

The country of Cyprus is tiny. Its $25 billion economy is smaller than Vermont’s, but it has bank deposits of $56 billion. In this it resembles Switzerland, whose $660 billion economy supports a banking sector with $1.2 trillion in deposits. The banking sector has grown because Cyprus has liberal money-laundering rules and extensive ties with Russia. It has been estimated that over a quarter of all bank deposits originated there. Limassol, the financial center, has three daily Russian-language papers.

But unlike Switzerland, Cyprus is part of the Euro. Due to losses on Greek government bonds, their banking sector needs to be recapitalized. Credit has dried up, but they can’t just print Cypriot Pounds. Cyprus needs to borrow Euros. Seventeen European finance ministers met over the weekend and decided that in exchange for a € 10 billion bailout package, Cyprus would need to dun all depositors for € 6 billion.

But apparently the leaders didn’t think breaching deposit insurance would cause a run on the banks. Now every ATM on the island is out of cash, and the banks are closed until Thursday. The implications of a deposit-tax are reverberating across southern Europe, wherever the Euro-crisis has been a prominent issue.

Europe has been searching for a solution to its currency crisis for years. Punishing savers seems unlikely to help.

Douglas R. Tengdin, CFA

Chief Investment Officer

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