Cyprus: The EU ‘Rescue’ That Risks Backfiring

With its $13 billion agreement to bail out Cyprus, the European Union this weekend thought that it had successfully doused the latest threat to its single currency, the euro. Cyprus has run into trouble because its banks are heavily exposed to Greek debt. Instead, the nature of the bailout – which features a levy on the bank deposits of ordinary Cypriots – has sparked a bank run on the island that threatens to spill over to other European countries. The sudden eruption of panic could still be contained; European officials on Sunday night were looking to revise the terms of the agreement ahead of a vote on the rescue package in the Cypriot parliament, in order to shield smaller depositors.  EU officials insist that Cyprus was always a special case. But by forcing ordinary citizens to fund the bank rescues up front, through a tax on deposits, the EU is setting a precedent that is chilling to people in other countries, such as Spain, which has looked at a bailout for its own beleaguered banking system. (MORE: Saving the Euro Zone, One Bank at a Time) In an impassioned address on Cyprus TV on Sunday night, President Nicos Anastasiades said, “Cyprus is in a tragic situation,” but he argued that this rescue package was the best one for the island nation. “I chose the least painful option, and I bear the political cost for this, in order to limit as much as possible the consequences for the economy and for our fellow Cypriots,” he said. The $13 billion bailout package may seem like chump change, but in fact it represents about 50% of Cyprus’s total economy.  The governor of the island’s central bank, Panicos Demetriades, has pointed out that, as a proportion of GDP, it is one of the largest bank bailouts ever, second only to the 1997 bank bailout in Indonesia. The government first requested a bailout in June 2012 after the two biggest banks, Laiki Bank and Bank of Cyprus, racked up huge losses on their exposure to

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