Cyprus saved – after a fashion – but have lessons been learned?

25th March 2013

The Cyprus crisis may well be over for now, though Cypriots themselves will be picking up the piecesyears for many  – as one huge source of economic activity – offshore banking has been dealt a huge blow.

A grim recession and redundancies are predicted in this BBC report.

For now, there is relief that the deal looks likely to stick. In return for Euro 10 billion of support, Laiki Bank is to be split into a good bank and a bad bank. The former will be taken over by the Bank of Cyprus, the latter wound down. There will be big losses for depositors with this bank – those with over Euro 100,000 will lose at least of over 40 per cent and it is likely that bondholders’ will be wiped out.

It is still to be decided how much big depositors with Bank of Cyprus will suffer.

It still remains to be seen how Cyprus can move to relax controls on people taking their money from the bank. Currently cash machines are restricted to dispensing little more than a 100 Euros. These two issues are likely to mean that for Cyprus at least the crisis is not fully over.

The one good thing to come out of the latest deal is the resuscitation the principle that savers in the Eurozone will see protection for their deposits up to Euro 100,000 or in the UK up to £85,000.

This is the amount protected by the UK or Eurozone compensation scheme. The first deal proposed a week ago with a levy on all accounts felt like a clear breach of this scheme. And it had led to fears that similar measures could have been imposed on other bailout countries with implications for confidence in their banking sectors too.

For anyone with very high balances, i.e above the UK and euro limits, the advice hasn’t changed. It must be to make sure you have your money spread among different institutions so you don’t breach this limit, just in case. You should check you haven’t placed money with one bank that might have two brands but that is regarded as one bank for the purposes of the scheme.

You could have money with Eurozone bank covered by its home scheme, and you should take a view about whether you are happy with that or not. If the bank is headquartered overseas, you may wish to make sure your bank is covered by the UK scheme – for example Bank of Cyprus depositors in the UK are covered by this country’s system.

And if you are following the best buy tables think long and hard about where your money is going.

But turning back to the crisis, Mindful Money has two questions for now

1) Why do politicians always have to go to brink?

2) Why was it ever a good idea to threaten to breach the principle that small depositors’ money should be protected, or what on earth have all the world’s bailouts been about in the first place?



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