a tragédia cipriota

The Greek tragedy that befell Greece and its bonds has, thus, now become a Cypriot bank tragedy.  Having borrowed roughly eight time Cyprus’ GDP, much of it from Russian companies and nationals, the Cypriot banks are bust, bankrupt, belly up and in no position to make good on their pledge to depositors that they could get their money back on demand.   Indeed, Cypriot bank demand deposits are frozen as the Cypriot government decides what to do.

Unfortunately, it’s three options are a rock, a hard place, and another rock.  The first is reversing its decision of a couple days back and accepting the IMF/EU conditions for a bailout, namely imposing a 9.9 percent haircut on deposits over €100,000 and a 6.75 percent haircut on smaller deposits.  The Russians hate this and the public hates it even more. The second is telling the IMF/EU to get lost, reopening the banks, and watching crazed depositors rush to get whatever money they can out of the banks on a first-come, first-serve basis.  The third is going off the euro and declaring that all deposits will be paid off in new Cypriot pounds, which the government will simply print out of thin air.

Whatever happens, no one is going to trust or use Cypriot banks.

Artigo de Laurence J. Kotlikoff, na Forbes