In the last few days the Government of Cyprus has begun to implement the measures demanded of it by the European Union, the European Central Bank and the International Monetary Fund (IMF). In return for providing €10 billion (US$13 billion) in support, a sum small by international standards, Europe has taken steps down a route that may set a precedent for Slovenia and others in the Eurozone such as Italy and Spain, if they are unable to resolve their long term economic problems.
The accord requires the Cypriot Government to take around 40 per cent of depositors’ holdings from anyone with over €100,000 (US$128,000) in the two largest Cypriot banks. It will also break up the Cyprus Popular Bank, the island’s second largest, and has resulted for the first time in countries using the Euro in severe restrictions being placed on withdrawals, transfers and the use of credit cards.
The message emerging, as this is being written, is that there will be a new order of priority of who has to bail out European banks and by extension EU nations in any future financial crisis. Oversimplified, it is first stock holders in troubled institutions; secondly holders of bonds, and thirdly depositors in troubled banks.