Be very afraid: there’s a banking crisis in Cyprus.
Huh?
The banks in Cyprus are in desperate straits – so desperate that, over this past weekend, representatives of the “troika” (International Monetary Fund, European Union and the European Central Bank) flew to the Mediterranean island to engineer an emergency bailout of its largest banks. The scene has become a familiar one in the Eurozone, so familiar that Wall Street already has shrugged it off as just another sideshow in the global banking circus.
But this sideshow may just be worth watching, because this bailout is being financed in large part by funds that people have on deposit in their checking and savings accounts. Under the plan, the troika will ride to the rescue but only if the government of Cyprus helps out by confiscating money that Cypriot consumers and others have deposited in the country’s banks.
But Cyprus doesn’t have an FDIC that insures their deposits, do they? Actually, deposits are insured up to 100,000 euro. But not if the bailout happens. Under the plan, the government will extract 6.75 percent from accounts up to the insured amount of 100,000 euro and 9.9% for deposits in excess of that insured amount . So a Cypriot family that has managed to set aside, say, 10,000 euro ($13,000) in a “government-insured” savings account will lose 675 euro ($878) once the plan is implemented. So much for deposit insurance.
So how did Cypriots react? The same way you would: they flocked to their local ATMs to get out as much of their money as they could, quickly draining them of available Euros (Monday was a bank holiday).
How did the government respond? By announcing that the banks would remain closed until at least Thursday . So that calmed everyone down, right?
Well, maybe not so much, as the Reuters photo shows.
And the clamor isn’t limited to the citizens of Cyprus. The Economist called the plan “unfair, short-sighted and self-defeating”. The Russian government, home to many sketchy businesses that allegedly launder their money through the island’s banks, is predictably outraged. There are even reports from Greek sources that Russian energy titan Gazprom may try to pull together its own alternative to the Troika’s bailout .
Suffice it to say that the Bailout Bunch has really stepped in it this time. They very well may use the next couple of days of shuttered banks and empty ATMs to devise a Plan B.
But even if they back off this time, there is a lesson in this for all of us. The global financial crisis hasn’t so much ended as gone dormant. Like an active volcano, there are occasional hiccups and belches, but no eruption. Until the next eruption. Governments can and will take extraordinary steps to mitigate the consequences of that eruption, but they are running out of ways to prop up failing banks while disguising the cost of these bailouts from consumers and taxpayers.
The last big bailout of US banks resulted in (temporarily) higher federal deficits, extraordinarily (and continuing) low borrowing rates for banks, a bloated Federal Reserve balance sheet, stubbornly high rates of unemployment and sluggish economic growth that may end up lasting a decade.
In other words, we paid (and are still paying) for the last eruption. Those costs can seem distant and abstract. Until they come for your checking account.