The Phaserl


Cyprus Collapse Triggers Unintended Consequences

by Keith Weiner,

Some people believe that by imposing losses on investors and reducing the Cyprus banking system liabilities, the European powers have addressed the problems in Cyprus (if harshly). Others think that it was just an unjust tax on depositors. I have written about the sequence of events. Cyprus banks borrowed money and bought Greek government bonds. Greece defaulted, imposing big losses on bondholders. Cyprus banks postponed marking down their losses. Now, they have to mark those losses and admit that they are insolvent. This triggered a run on the banks. Now, finally, shareholders, bondholders, and depositors are taking their losses. The government of Cyprus and the “Troika” did not provide enough money to pay everyone.

Within Cyprus, there is now uncertainty about remaining deposits, capital controls, and the solvency of the Cyprus government itself. Elsewhere, the focus turns to other countries (e.g. Slovenia) where markets are becoming jittery that the same thing could happen.

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