Steven C. Kyle, an expert in macroeconomics and government policy and a professor of management at Cornell’s Dyson School of Applied Economics and Management, discusses the implications of the Cyprus banking crisis, the bank-deposit tax, and its potential impact on the Euro.
Kyle says:
“When observers of the ongoing series of European bank crises hoped that taxpayers would stop taking the hit through massive bailouts of banks – as happened in Ireland – they didn’t imagine that the answer would be to confiscate a share of small-time deposits. But that is exactly what could happen in Cyprus.
“This Mediterranean island is in many ways the banking Cayman Islands of Europe – where banking and money laundering, particularly from Russian businessmen, is a major industry. With potential liabilities for the national deposit insurance scheme far outstripping its ability to make good on the promises, Cyprus had little choice but to accept whatever the Germans wanted to offer. In the run-up to Angela Merkel's re-election bid in September, there was no way that was going to include German assistance.
“But what a terrible precedent! Can anyone in Europe have confidence that their account won't take a hit the next time there is a crisis? If I were them, I would take my money out now and put in a safer place. They have made bank runs way more likely by doing this.
“But is Cyprus itself going to crash the Euro? No, it is too small as a share of the whole. A corollary of that lack of size is that Cyprus lacks the political strength to resist EU take-it-or-leave-it bailout offers. Italy and Spain have far more power, so this may not be as much of a precedent as some might imagine. But it sure isn’t good news.”
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