Economics Nobel laureate Paul Krugman could not have been clearer about the dangers of forcing depositers in Cypriot banks to take a loss on their accounts â€" known as a haircut.
“OK, I didn’t see that one coming. With all the problems in Greece, Italy, Spain, and Portugal I wasn’t watching Cyprus. But that’s where the big euro news is this weekend; in return for a bailout, Cyprus is supposed to impose a large haircut â€" that is, loss â€" on all depositors in its banks,†Paul blogged.
“It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying ‘time to stage a run on your banks!’â€
Our colleagues Landon Thomas and Liz Alderman write that with smaller deposits being taxed at 6.75 percent to repay the European buyout of Cypriot banks, “banks will be confiscating money directly from retirees and ordinary workers to help pay the tab for the €10 billion bailout or $13 billion.â€
The Cypriot bailout follows those for Greece, Portugal, Ireland and the Spanish banking sector â€" and is the first where bank depositors will be touched.
Public officials in Spain and Italy did their best over the weekend to portray the situation in Cyprus as unique, and to insist that deposits in those countries remained safe.
Still, as Paul Krugman writes: “Tomorrow and the days immediately following should be very interesting.â€
It may take the better part of the week to see how things turn out. The newly elected Cypriot president believes the legislature would not approve the terms, which could put the whole bailout at risk â€" and the whole banking sector in tiny Cyprus.
Banks will not open on Tuesday, as planned, and may not even open on Wednesday. Those efforts, to avoid a run on the! banks by depositors, may or may not work in Cyprus â€" not to mention in Spain, Italy and Portugal.
