Krugman...Cyprus: The Sum of All FUBAR

[dkf]

What can be done? First off, Cypriot banks cannot honor their debts, which unfortunately overwhelmingly take the form of deposits. So a default on deposits is inevitable.

As I now understand it, the initial screwup was a joint error of the Europeans and the Cypriots. Europe didn’t want an explicit bank resolution, which would among other things have given clear seniority to small insured deposits; instead, it wanted this essentially fictitious tax scheme. Meanwhile, the Cypriot government still has the illusion that its banking model can survive, and wanted to limit the hit to the big overseas depositors. Hence the debacle of the small-deposit tax.

In the end this probably comes, in some version, to what it should have been from the start — a big haircut on deposits over 100,000.

But even then the situation is by no means under control. There’s still a real estate bubble to implode, there’s still a huge problem of competitiveness (made worse because one major export industry, banking, has just gone to meet its maker), and the bailout will leave Cyprus with Greek-level sovereign debt.

http://krugman.blogs.nytimes.com/2013/03/21/cyprus-the-sum-of-all-fubar/

[WillyT]

1. K & R !!!

[ashling]

2. Ever watch HGTV's "Househunters International" ?

They were in Cyprus on one recently. I keep thinking: it's not good enough that we've got to blow real estate bubbles here, we've just got to blow our real estate bubbles all over the world.

[dkf]

4. I didn't realize they had a problem...

But I'm not surprised as any country with an outsized financial sector is fertile ground for a real estate bubble I imagine.

[alcibiades_mystery]

3. Cyprus is essentially the Cayman Islands of Europe, which is what few people are saying

The giant deposits are generally offshore folks looking for a tax haven and/or out-and-out money laundering.

Think on this one carefully: "Cypriot banks cannot honor their debts, which unfortunately overwhelmingly take the form of deposits."

Um, huh? Imagine the colossal screw up that has to have occurred for a banking system that basically serves as a deposit destination for tax purposes to be unable to honor deposits! That's their only business: holding deposits. They bring tax rates to near zero (and we're talking Europe here!), precisely so they can sit on deposits while picking up a little something at the margins. Until somebody in these banks got it into their head to go all casino with the deposits.

It's truly unbelievable. But if you want to cry for the tax shelter accounts in these banks, consider how many tears you'd shed if the Cayman Islands accounts suddenly had to take a haircut. Would you be wailing for the Romney's of the world?