Friday, March 22, 2013

Cyprus’s Three-Way Game of Chicken

March 22, 2013

Europe’s handling of a bailout for Cyprus is looking more chaotic by the minute. Negotiations have descended into a three-way game of chicken among the island nation, Russia and the euro area’s leaders.

The initial plan to make insured depositors pay for part of the bailout was terrible. The Cypriot parliament rejected it, and now the European Central Bank has set a deadline of March 25, warning that unless a new deal is reached it will pull the plug on the funding that’s keeping Cyprus’s banking system alive.

What’s amazing about this fiasco is that Europe’s leaders had almost a year to think about how to avoid it. Ever since Greece restructured its government debt, which made up a large share of Cypriot banks’ investments, it has been apparent that the banks would need a major recapitalization. With some preparation, Cyprus could have offered an excellent test of a euro-area banking union, in which the ECB would step in, force losses on the Cypriot banks’ creditors and quickly reopen the banks under new ownership.


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