Photo: Marc Chandler
It ranks modern aid packages in terms of the recipients’ GDP.Assuming that Cyprus parliament approves some version of the tax on depositors–which the newly elected president seems to have favoured the tax on small depositors–and a complete catastrophe is avoided, Cyprus will have the second largest aid program at 56% of GDP, just below Indonesia’s 57% package in 1997 and Argentina’s 56% package in 1980.
As ironic as it may seem, granting our assumption, Cyprus will be getting more assistance than the other euro area countries. Cyprus participated in the aid programs of Greece, Ireland and Portugal. At their peak, Cyprus banking assets were roughly eight times GDP, making them too big for the government to save. They made a big bet on Greek sovereign bonds and lost their proverbial shirt (~4.5 bln euros).
The failure to reach an agreement will see the ECB no longer allow the Cypriot central bank to lend to the insolvent local banks under the Emergency Lending Assistance (ELA) program. This would trigger a complete collapse of the Cyprus financial system and would produce a disorderly default, crushing small depositors and small and a medium enterprises.
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