Well there is either a little evil creature travelling throughout the world collapsing economies or there is a common practice of excesses and risky investments carried out by financial institutions around the world. I would tend to believe is the first one because it would be hard to believe that our freely elected politicians would have allowed these excesses to happen. So what has this little evil creature done now? What has happened in Cyprus?
Well first, Ms. Merkel has elections this year. And Germany being the first economy in Europe, and thus the main funder of the bailouts in Ireland, Greece, Portugal, Italy, Spain, has said the buck stops here, otherwise Ms. Merkel will loose her slim chances of getting re-elected. The buck stops here is being shouted in Brussels.
Cyprus, an island twice the size of Rhode Island and similar number of people, has used its strategic location for tourism (Mediterranean sea), as an offshore tax haven that with its modern infrastructure has attracted international institutions and companies, both legitimate and illegitimate. Half of current deposit holders in Cyprus are Russian. And not precisely the Russian middle-class. Another large chunk is taken by Greeks which fled their country’s banks to their neighbouring greek-speaking nation.
So Germany has imposed, through the Eurogroup, notorious restrictions on capital movements (also known as a Corralito, term coined in Argentina for a similar situation in the 90s) to avoid capital flight, but also to have all deposit holders in Cyprus pay the bill. This differs from other bailouts, where the debt was incurred by the government “being saved”, since it directly taxes deposit holders to cover 40% of the bailout. This represents a total of 5.800 million euros. The Cypriot government is already paying the bill for the bailout of its banks from two years before. It is not a full-scale Corralito since its a temporary measure, not one that would block capitals for months. You wouldn’t want to piss off the Russian oligarchy too much.
So whilst the Eurogroup pretends to pay for this with some of the Russian olygarchy’s money, it affects both Greeks and Cypriot savers too, who had nothing to do with the issue in the first place. Again as always, the weaker pays.