Monday, March 18, 2013

Island Nightmares: Incipient Cypriot Bank Mess

A snip from Krugman followed by two more links on what could be an explosive mess in Cyprus (and financial markets). 
Anyway, the Cyprus story has obvious parallels with both Iceland and Ireland, with RMML — Russian mobster money laundering — as an extra ingredient. All three island nations had a run of rapid growth as banking havens that left them with banking systems that were too big to save. Iceland, at peak, had banks with assets that were 980 percent of GDP, more than 10 times the US number; Ireland was at 440 percent. Cyprus, at around 800 percent, was closer to Iceland in this respect. For a good summary, read this.
In all three, runaway banking was the source of the crisis — although not everyone seems to get this, even now. Joe Weisenthal finds the most clueless remark so far about Cyprus, and it comes, you guessed it, from George Osborne, who seems to think it has something to do with lack of fiscal discipline. Actually, as the IMF (pdf) points out,
Before the 2008 crisis, Cyprus enjoyed a long period of high growth, low unemployment, and sound public finances.
Oh well. In any case, the question is what to do now.
I have to imagine the high overseas/absentee depositor (even if that includes Russian mobsters) factored into the remedy.  Beware of chasing yield in overseas depository institutions. 
Analysis from Calculated Risk., who highlights the regulatory faiulure and danger of chasing yield.  And a non-technical perspective that focuses on the possible policy consequences.

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