By Alexander Apostolides on February 20, 2013

My letter to the Wall Street Journal

To the Editor,
The Wall Street Journal

Dear Madam/Sir,
Your article "Europe's Least Essential Bailout: Cyprus is an ideal testing ground for forcing loses on all bank creditors (18th of February, 2013)" seems to be making a valid argument but only because it is missing two key ingredients: Facts and Data.

Cyprus has requested 17bn euro bailout from the "Troika" of IMF, ECB and EU, and that is enough to secure the viability of its banks and the borrowing needs of the state without any need of creditor or depositor losses. However your article suggests instead  in "bailing-in" depositors that hold an amount above the insured 100,000 euros; yet this will require "Troika" support of 35 billion euros.

This is because no nations' deposit insurance scheme (and this includes the US FDIC) could honour its commitments to depositors if the largest two banks in an economy fail. As a result if Cyprus is forced to "bail-in" its depositors it only has two options:
1) Request a bailout of 35billion euro (currently the amount of deposits that are guaranteed) from the  "Troika", thus condemning Cyprus in having an unsustainable debt, forcing "Troika" into accepting looses on the amount borrowed.
2) Print its own currency to cover the shortfall of the deposit guarantee scheme (forbidden by Eurozone agreements) and introduce Capital controls (forbidden by the European Single Market Agreement). Unlike Iceland, which is not a member of the European Union, a decision to introduce capital controls by Cyprus will mean at least a temporary withdrawal from the EU, as controls of capital are forbidden under  the EU acquis. Since Cyprus is still an integral nation state with veto powers in key European Union decisions, this decision could condemn any progress in  EU wide issues, such as the future EU budget.

Thus if one ignores the data that  a "bailing-in" will cost the official sector lender twice as much, and the facts that Cyprus is a member of the Eurozone and the European Union, the argument proposed by your article might appear valid. Thankfully we here in Cyprus are working towards a solution that would ignore neither the real facts or the data of our situation.
Dr. Alexander Apostolides
Lecturer in Economic History
European University Cyprus

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