On Saturday the 16th of March, in an economic bailout plan supported by the EU and the IMF, the deposits in Cypriots banks were frozen. Additionally, in an unprecedented move, a percentage of those private deposits (held both by common people and business) will be seized to “help” repay some of the amount of the bailout. If you have followed the recent story of the crises in Latin America or have suffered from its consequences, this episode of the European crisis may seem terribly familiar. In this brief analysis if the Cyprus bailout I review some of the possible implications for the European Union and the world. I will argue that the conditions of the bailout create an extremely dangerous precedent for the rest of the countries in Europe, especially for Spain, Greece, Italy and Portugal. Three days after the announcement, as the protests in Cyprus and concern in the rest of Europe were increasing, it seemed that some aspects of the bailout plan could change, but even if that happens the negative effects could spillover beyond Cyprus

1. Cyprus:
Big
mistakes,
new
troubles.
And
why
it
matters
for
the
EU
(and
the
rest
of
the
World)
Julio
J.
Prado,
PhD(c)
Lancaster
University
Management
School
(UK)
IDE
Business
School
(Ecuador)
E-­‐mail:
pradojj@gmail.com
Twitter:
@pradojj
On
Saturday
the
16th
of
March,
in
an
economic
bailout
plan
supported
by
the
EU
and
the
IMF,
the
deposits
in
Cypriots
banks
were
frozen.
Additionally,
in
an
unprecedented
move,
a
percentage
of
those
private
deposits
(held
both
by
common
people
and
business)
will
be
seized
to
“help”
repay
some
of
the
amount
of
the
bailout.
If
you
have
followed
the
recent
story
of
the
crises
in
Latin
America
or
have
suffered
from
its
consequences,
this
episode
of
the
European
crisis
may
seem
terribly
familiar.
In
this
brief
analysis
if
the
Cyprus
bailout
I
review
some
of
the
possible
implications
for
the
European
Union
and
the
world.
I
will
argue
that
the
conditions
of
the
bailout
create
an
extremely
dangerous
precedent
for
the
rest
of
the
countries
in
Europe,
especially
for
Spain,
Greece,
Italy
and
Portugal.
Three
days
after
the
announcement,
as
the
protests
in
Cyprus
and
concern
in
the
rest
of
Europe
were
increasing,
it
seemed
that
some
aspects
of
the
bailout
plan
could
change,
but
even
if
that
happens
the
negative
effects
could
spillover
beyond
Cyprus.
After
almost
five
years
of
an
ongoing
European
crisis,
we
are
all
pretty
much
aware
of
the
problems
that
the
European
Union
is
facing.
No
clear
economic
policy
can
be
applied;
no
straightforward
solution
exists.
The
only
thing
we
can
give,
as
external

2. Cyprus:
Big
mistakes,
new
troubles
March
2013
Julio
J.
Prado
observers,
are
some
ideas
of
whether
a
policy
will
be
mainly
positive
or
mainly
negative.
If
there
is
something
we
have
learned
from
the
Great
Recession
is
that
both
orthodox
and
heterodox
tools
have
failed
to
provide
a
solution,
and
it
is
easy
to
point
the
finger
to
those
that
now
have
the
problem
in
their
hands.
Nevertheless,
there
are
some
policy
decisions
that
are
mistaken
and
may
deepen
and
prolong
the
crisis.
In
my
opinion,
this
is
the
case
of
the
recent
bailout
plan
in
Cyprus.
Here
are
some
ideas
(this
is
not
intended
to
be
a
comprehensive
analysis):
1) The
banks
have
been
the
cornerstone
of
the
European
crisis.
For
reasons
that
I
will
not
cover
in
this
analysis,
the
roots
of
the
current
crisis
can
be
easily
traced
back
to
the
easing
of
the
lending
conditions
(e.g.
reductions
in
the
financial
regulations),
to
high
levels
of
private
and
public
debt,
and
to
some
unethical
practices
not
only
from
politicians
but
also
by
private
bankers.
Thus,
most
of
the
efforts
from
the
European
Union
authorities
focused
on
restructuring
the
banking
sector
(e.g.
increasing
banking
capitalization),
while
injecting
more
money
to
the
economy
(through
banks
or
public
spending)
in
order
to
restart
growth
and
reduce
the
chronic
unemployment.
The
recent
bailout
in
Cyprus
goes
in
the
same
line,
and
comes
with
similar
though
austerity
measures
that
need
to
be
implemented
in
order
to
receive
the
money
transfer,
but
the
case
of
Cyprus
goes
even
further
since
it
introduces
for
the
first
time
a
levy
on
all
the
private
savings.
The
“tax”
will
be
equivalent
to
9.9%
of
the
total
savings
amount
if
the
value
exceeds
100.000
euros,
and
6.75%
if
the
amount
is
below
that
value.
2) Now,
it
might
seem
reasonable
to
assume
that
if
the
Cypriots
are
going
to
receive
a
hefty
loan
(10
billion
euros)
from
the
EU,
they
will
have
to
contribute
something
in
order
to
repay
the
loan.
After,
I
can
be
argued
that
even
if
it
is
easy
to
pinpoint
the
culpability
of
the
crisis
to
politicians
and
bankers,
the
common
people
from
Cyprus
(the
households,
the
consumers,
the
ordinary
common
man)
are
also
guilty
in
some
degree.
Although
I
do
not
endorse
this
argument,
I
understand
why
many
people
especially
in
Germany
might
support
it.
Granted!
But
this
is
not
the
focal
point
of
discussion,
what
we
should
be
discussing
is
whether
the
conditions
of
this
bailout
are
the
best
(are
the
fairest)
for
Cypriots
and
ALSO
for
the
future
of
the
European
Union
and
the
German
tax
payers
(who
are
directly
and
indirectly
involved
in
this
bailout).
My
argument
is
that,
the
conditions
of
the
bailout
are
not
fair
and
economically
dangerous
for
the
Cypriot
economy,
and
even
more
perilous
for
the
other
countries
in
Europe.
Yes,
including
Germany.
3) Cyprus
has
a
highly
informal
economy.
The
easing
of
the
regulations
in
the
banking
sector
attracted
a
large
number
of
money
inflows
from
Russia
(including
a
public
credit
of
2,5
billion
euros).
According
to
some
reports,
these
capital
inflows
may
be
related
to
illegal
activities
or
more
simply,
tax
avoidance.
Clearly
the
9,9%
tax
to
deposits
that
are
higher
that
100.000
euros
would
target
most
of
these,
which
could
be
seen
a
“fair”
and
even
have
a
large
support
from
the
public.
(As
I
will
argue
next,
even
targeting
those

3. Cyprus:
Big
mistakes,
new
troubles
March
2013
Julio
J.
Prado
large
accounts
is
dangerous.)
But
remember
there
is
also
a
levy
of
6.75%
to
deposits
smaller
than
100.000
euros.
This
part
of
the
bailout
is
not
so
easy
to
defend
in
terms
of
an
“evenhanded
contribution”
since
it
hits
the
large
majority
of
Cypriots,
those
that
have
already
been
suffering
by
the
European
Crisis
for
the
last
five
years.
It
targets,
small
and
large
households,
students,
small
entrepreneurs
equally.
Now,
a
6,75%
could
be
considered
a
small
amount
that
will
not
destabilize
someone’s
personal
finance
but
it
is
still
a
confiscation
of
private
accounts,
and
in
some
cases
this
could
but
some
family
savings
in
peril.
4) The
Cypriot
bailout
plan
breaks
at
least
two
(unspoken)
rules.
First,
ordinary
people
savings’
were
not
to
be
touched.
Secondly,
investment
banks
had
to
take
some
of
the
blame
in
case
of
the
financial
crisis.
It
is
widely
agreed
that
investment
banks,
those
that
gamble
in
the
financial
markets
using
complicated
financial
operation
(credit
default
swaps,
mortgage
backed
securities,
options,
money
arbitrage,
etc),
should
not
be
saved
in
case
of
the
financial
crisis.
Their
business
implies
risk,
but
this
is
supposed
to
be
a
calculated
risk,
thus
if
they
earn
a
lot
of
money
that
is
fine,
and
if
they
loose
a
lot
of
money
that
is
also
fine.
It
is
their
business.
The
honest
truth
is
that
the
investment
banks
have
been
highly
spoiled
and
protected
both
in
the
USA
and
the
EU,
but
this
new
Cypriot
bailout
is
a
brand
new
way
of
passing
all
the
harsh
consequences
of
the
crisis
to
the
commons
and
nothing
to
the
banks.
5) The
impact
at
the
level
of
ordinary
people
is
clear.
Why
is
it
so
bad
for
the
EU
as
a
whole?
The
name
of
the
word
is
confidence.
Confidence
is
what
keeps
the
economic
systems
alive
or
what
destroys
them.
Sadly,
the
EU
is
trying
to
restore
confidence
in
the
financial
sector
by
injecting
more
money
into
the
Cypriot
economy,
but
under
these
conditions
the
confidence
is
eroded.
Think
as
if
this
were
your
money.
What
would
you
do
after
this
storm
has
passed?
Would
you
go
and
leave
your
deposits
again
in
the
bank?
What
if
Cypriot
economy
needs
a
new
bailout
in
the
future?
The
panic
this
could
generate
is
immense
and
creates
a
long
and
persisting
damage
to
the
confidence.
6) EU
authorities
are
trying
to
reassure
this
was
the
only
way
out
for
Cyprus.
More
importantly,
they
are
reassuring
that
something
like
this
would
not
happen
in
any
other
country
in
Europe.
In
the
light
of
the
recent
events
are
these
statements
credible?
Portugal,
Italy,
Spain
and
Greece
may
need
new
credits
from
the
EU
during
the
next
months.
By
remembering
the
case
of
Cyprus,
the
simple
announcement
of
the
negotiations
for
a
bailout
may
trigger
bank
runs,
resulting
in
more
fragile
banking
systems
in
Southern
Europe.
Nobody
wins
from
a
higher
volatility
and
uncertainty
in
the
financial
sector.
The
contagion
of
uncertainty
could
even
backslash
to
the
Germanic
economy
and
to
the
whole
European
Union
as
the
recent
decline
in
the
Euro
versus
the
dollar
is
showing.

4. Cyprus:
Big
mistakes,
new
troubles
March
2013
Julio
J.
Prado
7) Finally,
the
support
of
the
IMF
opens
a
series
of
questions
regarding
the
future
of
economic
policy
in
a
downturn.
It
is
one
thing
to
hear
that
a
country
–on
its
own-­‐
is
seizing
deposits
or
applying
similar
measures.
It
would
even
be
understandable
that
the
EU
would
make
such
a
proposition
for
one
of
its
members,
but
the
IMF
backing
up
such
a
measure
open
a
whole
new
level
of
intervention
in
the
future.
Not
only
for
European
Countries,
but
for
the
world
as
whole.
It
might
sound
exaggerated
since
Cyprus
is
a
very
small
country
and
the
effects
of
the
bailout
seem
localized,
but
the
signals
and
negative
incentives
this
bailout
is
sending
will
have
a
large
spillover
effect.
Maybe
larger
than
the
EU/IMF
authorities
care
to
admit.
8) In
the
eve
of
the
year
1999,
Ecuador
was
in
the
middle
of
the
worst
economic
crisis
the
country
had
ever
seen.
During
a
weekend,
all
bank
accounts
were
frozen
to
prevent
a
“bigger
economic
meltdown”.
Half
of
the
total
of
each
current
and
savings
accounts
remained
frozen
for
several
months.
While
long-­‐term
savings,
repos
and
investments
remained
frozen
for
one
year.
The
situation
for
ordinary
people
and
business
was
desperate
and
less
than
one
year
later
(January
2000)
Ecuador
had
to
abandon
its
own
currency
and
adopt
the
dollar
as
the
only
legal
currency
(exchange
rate
of
25.000
sucres
per
dollar).
The
abrupt
transition
into
the
full
dollarization
scheme
was
long
and
painful,
producing
a
high
economic
volatility
and
political
turmoil,
but
the
tight
self-­‐imposed
conditions
(the
dollarization
is
a
strict
fixed
exchange
rate
regime,
in
which
monetary
policy
is
almost
obsolete)
finally
brought
stability
and
growth.
Contrary
to
the
case
of
Cyprus,
no
obligatory
amount
was
seized
by
the
Government
(although
the
real
value
of
the
deposits
was
highly
depreciated
or
lost
during
the
resulting
banking
crisis).
The
case
of
Cyprus
may
be
equally
difficult.
After
the
banking
freeze
had
been
(partially)
removed
in
Ecuador,
there
was
an
exceptionally
high
risk
of
a
stampede
and
a
new
collapse
of
the
remaining
banks,
the
only
thing
that
prevented
this
from
happening
was
the
dollarization
scheme.
Is
there
such
a
mechanism
in
the
Cypriot
economy?
Of
course,
that
country’s
currency
is
the
euro,
which
is
a
strong
currency,
so
there
is
no
incentive
to
abandon
it,
except
if
the
Government
authorities
were
forced
to
devalue.
After
the
freezing
is
over,
if
the
confidence
in
Cypriot
banks
has
not
returned,
the
EU
will
have
a
though
decision
to
make.
Keep
sending
money
(another
bailout)
or
leaving
Cyprus
to
its
own
faith.
Cyprus
is
a
small
economy
so
the
contagion
effect
will
not
come
from
that
side.
Nevertheless,
as
I
have
pointed
earlier,
there
are
many
other
possible
spillovers
that
could
affect
the
EU
in
other
ways.
The
case
of
Cyprus
is
unfortunate
and
sends
the
wrong
signs.
A
poor
handling
from
the
EU,
the
IMF
and
the
Government
has
created
a
solution
that
is
worst
than
the
problem.
Is
this
just
another
act
in
the
EU
crisis
drama,
or
are
we
witnessing
the
beginning
of
a
new
genre
of
policy…and
tribulations?
We
will
know
soon.