These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:
Cyprus would be better off to leave the euro than accept the terms of the bailout imposed by the European Union, International Monetary Fund and European Central Bank.
Until recently, Cyprus was a prosperous island economy thriving through strong tourism, shipping and maritime related activities, and a significant international financial sector.
Its major banks have branches in Russia, the Ukraine, the U.K. and other overseas locations, and have attracted large offshore deposits. Cyprus has gained great popularity as a portal for western investment into Russia, Central and Eastern Europe, China and India.
Much like New York City, London and other big-city European banks, the Cypriot banking sector attracted deposits much larger than it could productively use lending in its local economy and invested in other financial instruments–Cypriot banks invested heavily in Greek sovereign debt.
The 2012 Greek government bailout engineered by the EU, IMF and ECB imposed losses greater than 50% on foreign bondholders–among those, Cypriot banks. Hence, the Troika, which is now imposing severe conditions in exchange for aid to bail out Cypriot banks, bears substantial responsibility for the present sad state of their balance sheets.
During the recent U.S. financial crisis, the Federal Deposit Insurance Corp. was adequate to restructure and secure deposits at smaller banks; however, the Federal Reserve printed hundreds of billions of dollars to purchase and work out souring bonds held by larger banks, and the Treasury borrowed similar sums to inject new capital into those banks. More importantly, depositors–large or small–did not lose any money during or after the U.S. crisis.
The ECB lacks the tools to participate in such bank workouts, and the EU lacks the borrowing authority of the U.S. Treasury–and the taxing powers to back up bonds. Hence, banks in Cyprus, just like those in Ireland and Spain in their banking crisis, lack a lender of last resort to keep them afloat while they restructure and work off losses through new, sounder business activities.
In the U.S. stockholders lost equity when banks went sour, but it kept the banks open and depositors kept their money. The Troika, in exchange for 10 billion euros ($13 billion) in aid, will likely impose losses of at least 20% on large depositors and require Cyprus to slash the size of its banking sector, relative to gross domestic product, to the average for the EU as a whole.
If such a condition were imposed on New York City, its economy would collapse and the Big Apple would suffer massive unemployment and huge population losses, as workers sought employment opportunities elsewhere. Continue reading…