Sunday, March 17, 2013

More On Cyprus

Tim Worstall notes that Cyprus has a form of deposit insurance, guaranteed by its government. And that the Eurozone is forcing the government to renege on that promise.

This is a big deal: deposit insurance is what stops bank runs.

And one of the big positive (and negative) features of joining the Eurozone is that people can bank with banks in other countries.

It will be interesting to see if the Cypriots make runs on foreign banks, and if that transmits the problem.

Worstall notes at the bottom that when Iceland’s banking system collapsed in 2008-9, its government did honor its deposit insurance. So this policy will make the Cypriot situation different from others.

P.S. Forgot to mention in earlier posts that depositors funds are being replaced with equity claims on the banks. So this is a bit like the Obama bailout of GM, where the unions were given equity in the bankrupt company in the hopes that it might perk up in the future.

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