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  • pudshaft pudshaft Mar 25, 2013 3:21 AM Flag

    CRISIS IS NOW WORSE NOT BETTER.....

    If anything, the situation is more troubling than a week ago; with the bizarre idea that depositors in one bank should be levied more heavily than in others; that at least one bank would be wound up; and that there would be restrictions on the movement of money in what is supposed to be a monetary union.

    It is not clear that it had to be this big a mess, but there are several uniquely tricky features to the Cyprus question.

    One is the sheer scale of the banking system relative to the economy. The infamous Irish guarantee of €400bn in bank assets amounted to an impossible three years' national income. But the Cypriot banks have assets equalling seven years' national income, which makes even a punitive Irish-style rescue out of the question.

    It also seems highly unlikely that the proposed €16bn bailout will be enough. Yet any significant amount more will bankrupt Cyprus.

    This brought into play another complication – that the IMF cannot lend money which has no chance of being repaid. That led directly to the crisis because the Cypriots had to find €6bn of their own, and tried to do it by taxing bank deposits.

    It would appear that this bailout will be as far as the IMF goes, but that won't be enough for Cyprus. One reason to fear a renewed euro crisis is the doubt over whether European governments will lend Cyprus any more money either.

    The immediate problem is to avert the collapse of the Cypriot banking system, and perhaps an exit from the euro, in the next few days.

    The sums of money involved are small on a European scale, but the principles and consequences are gigantic. Here at home, the €15m loss facing credit unions from the liquidation of the former Anglo Irish bank is a chilling reminder of what it means for banks to fail and be unable to pay their debts.

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