Cyprus has been a safe haven for money-laundering operations. Russians have large deposits in the island's banking system. The tiny nation, which is one of the 17 members of the euro zone, has only 860,000 people, but the banks have €68.4 billion in deposits. The Germans are in no mood to bail out Russian depositors in Cyprus, which is why the initial bailout plan required a 9.9% wealth tax on large uninsured deposits. Small depositors were also hit with a levy.
Undoubtedly, the final deal will be amended to cushion the blow to small depositors. However, the latest mess in the Euro Mess is a reminder that Mario Draghi's pledge to do whatever it takes to defend the euro won't clean up the mess. The pledge bought time, which must not be wasted or the Euro Mess will last for years to come. The “Cyprus Moment” is yet another waste of time.
For now, the euro zone is falling deeper into recession, as evidenced by the region's weak production numbers during January (Fig. 1). The UK is heading in the same direction (Fig. 2). The question is how long will the Cyprus Moment last, and will it morph into Europe's Lehman Moment? I doubt it. So far, government bond yields for both Italy and Spain remain subdued (Fig. 3). I don't expect that TARGET2 payments will show outflows from these two debt-challenged nations to Germany as a safe haven (Fig. 4).
Undoubtedly, the final deal will be amended to cushion the blow to small depositors. However, the latest mess in the Euro Mess is a reminder that Mario Draghi's pledge to do whatever it takes to defend the euro won't clean up the mess. The pledge bought time, which must not be wasted or the Euro Mess will last for years to come. The “Cyprus Moment” is yet another waste of time.
For now, the euro zone is falling deeper into recession, as evidenced by the region's weak production numbers during January (Fig. 1). The UK is heading in the same direction (Fig. 2). The question is how long will the Cyprus Moment last, and will it morph into Europe's Lehman Moment? I doubt it. So far, government bond yields for both Italy and Spain remain subdued (Fig. 3). I don't expect that TARGET2 payments will show outflows from these two debt-challenged nations to Germany as a safe haven (Fig. 4).
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