I’m hopelessly naive about financial systems. (I have a grade C ‘A’-level economics, but that was in 1985, back when people still voted for Mrs Thatcher, so it’s like a degree in physics before relativity was discovered.) So I don’t understand the current lamentation about Cyprus.
Cyprus built up a gargantuan banking sector (835% of annual national income). It was a low-tax regime, in the sun, that encouraged lots of Russians (in particular) to invest their money there.
The World Bank’s Constantinos Stephanou wrote in his 2011 paper The Banking System in Cyprus: Time to Rethink the Business Model? (PDF):
The significant expansion of the Cypriot banking system in general, and of the big domestically-owned banks in particular, has been part of the broader push to promote the island as an international business centre …
The current size of the Cypriot banking system, and particularly of the two biggest banks, raises the issue of whether growth has unequivocally been a good thing that should continue indefinitely.
In the case of Cyprus, the two big domestically-owned banking groups appear to satisfy the criteria for being systemically important… Their role as intermediaries of foreign financial flows and as providers of domestic financial services means that the collapse of either of them would have significant negative repercussions on the real economy and deleterious reputational effects on Cyprus as an international business centre.
Lots of people invested their money in Cyprus because it had low tax and good returns. They put their money there, rather than somewhere else, because they believed that they would get more money in Cyprus than in their own countries.
Meanwhile, the banks in Cyprus were too big to fail. Those words – “too big to fail” – are to international capitalists what “YOLO!” is to mid-teenage girls as they guzzle five bottles of alcopops, take selfies of themselves doing duckfaces with their bezzies before they snog an ugly stranger, burst into tears and throw up.
In brief: investors got better returns for their money, but took no actual risk because the banks were too big to fail. Until they failed.
The EU decided to bail out Cyprus. If it hadn’t, presumably those banks would have collapsed and depositors lost everything. Because it’s being bailed out (with EU money), depositors with over 100,000 Euros will lose 30% of their deposits, and retain 70% of them. They took a risk in the hope of better-than-average returns, as is their right in a capitalist economy, and lost. But instead of losing everything, they keep most of it.
Meanwhile, I’ve given them some of my money as part of the EU bailout, yet I was never invested in the dodgy Cypriot bank in the first place.
So why are they complaining?