Cyprus’ Four Options for Avoiding Collapse
March 20, 2013 2 Comments
The only thing worse than Cyprus accepting the rotten bailout program that European policy makers agreed on late last week was Cyprus rejecting it. Yesterday, the parliament voted decisively against the terms of the bailout, with 36 members opposing it, the ruling party abstaining and not a single vote in favor.
Policy makers will have to come up with a new plan, and they had better hope the European Central Bank buys them enough time to do so before Cyprus’s financial system melts down.
A bank holiday was declared at least until tomorrow to prevent panicked savers from withdrawing their deposits from banks when they learned over the weekend that a levy may be imposed on deposits as part of a bailout program.
If depositors were worried about losing their savings before, they should be even more worried now. Last week, the ECB threatened to cut off emergency liquidity assistance to Cyprus’s two main banks in the absence of a bailout program. This would result in the immediate collapse of both banks, and they would default on their debt and most, if not all, of the 30 billion euros ($39 billion) in deposits they hold.
Faced with a bank run and the collapse of its largest financial institutions, Cyprus would only be able to rescue its banks and its economy by printing money and leaving the euro.
Luckily, this needn’t happen.
To read the rest, please see the original piece posted on BloombergView.