What Happens in Cyprus Now?
Board: Berkshire Hathaway
The overspending by Greece created a ripple effect to Cyprus.
Well, if you're going to blame the Cyprus situation on "overspending by Greece", which required a bailout, which encouraged Cyprus banks to look for higher returns, which made them invest in high-risk Greek bonds, which encouraged the banks offer world-high interest rates to attract deposits ...
... then you might as well blame the Lehman bankruptcy on me, because I'm sure I was buying something somewhere that had something to do with something they did.
This is not complicated. Cyprus banks took in 800% of Cyprus GDP by offering ridiculously high interest rates which they could not pay. Looking to the Cyprus government for a bailout they were rebuffed. Looking to the EU for a bailout they were rebuffed unless they dipped into depositors' accounts. I'm sure it started slowly, as it usually does, with some banks looking around for high yields and finding them on the risky Greek isle. Getting hooked on the juice (like the US mortgage market a few years back) they kept going back to the table for more, more, more until it became unsustainable.
This was stupid on many levels, but "Cyprus government spending" was not one of them. "Greek government spending" was not one of them. The bankers' assumption of "TBTF" might have been one of them, and greed in pushing a banking business model that had no chance of surviving a hiccup was one of them, and regulatory failure was one of them, but not "government spending."
(Yes, I think was was handled about as hamfistedly as possible. Announcing a confiscation the way they did was idiotic. Maybe a "forfeiture of the last years' interest" for small savers would have been better, and perhaps a wipeout of bondholders coupled with a "forced" bond equity conversion for large account holders, or maybe there are other things.)
But the violation of the FDIC-like guarantees is unconscionable, and if there isn't a bank run Friday, I am sure there will be - in many countries - at the first sign of a belch at some point in the future. As it is, they have vaporized any concept of "trust" in a government protection scheme for banking account holders, angered everyone in Cyprus, pissed off the Russian mafia, demonstrated (again) how banks are really money launderers, shown the world how feckless the EU Commission really is, and likely destroyed the Cypriot banking industry anyway. It's hard to envision a worse outcome on so many levels at once.