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Short summary on the resolution in Cyprus [ClearOnMoney]
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Short summary on the resolution in Cyprus

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Commentary

Short summary on the resolution in Cyprus

25 Mar 2013 by Jim Fickett.

The most important point is that the agreement reached over the weekend in Cyprus sets a new precedent. While all the other bank rescues in the last three years have kept depositors and senior bond investors whole, and passed the cost to taxpayers, in Cyprus only insured deposits (i.e. up to 100,000 euros) will be spared. Uninsured depositors and senior bond holders will take substantial losses. This is a very good thing from the point of view of moral hazard, i.e. sending a warning to reckless lenders that they will not always be rescued. But it is a somewhat dangerous thing for the euro zone, and it will be very interesting to see if, as a consequence, there will now be a problem with deposit flight in other countries that are near the edge, especially Spain.

A second main point is that, although bank failure and a chaotic exit from the euro were avoided, the Cypriot economy will take a major hit. International banking was a large part of the economy, and it is hard to imagine, with depositors taking a major loss, that this will continue. Société Générale predicts that Cyprus will see a 20% drop in GDP by 2017.