Cyprus: Is the Precedent Worth $7.25B?

Cyprus: Is the Precedent Worth $7.25B?

posted by Adam Levitin

Stepping back from the Cyprus bail-in, I'm wondering if it is penny-wise, pound-foolish. The depositor tax is only supposed to raise about $7.25 billion (5.8 billion Euros).  Given the risks created by a bailout being rejected and the risk of runs created in other countries, does it really make sense to demand the depositor tax?  $7.25 billion seems like a really cheap price for avoiding the problems that the Cyprus depositor tax is making. Indeed, in the big picture, the whole Cyprus bailout package is only around $23 billion.  It makes me wonder why the EU doesn't just lump the whole thing.  (Easy for me to say when I'm not paying...)

There is, of course, a strong equity argument for parallel treatment of all bailed-out countries, and that suggests that Cyprus should have to pay like any other country. But that argument cuts both ways:  it means no freebies, but it also means just austerity measures, rather than a bail-in.