Proposal to Address the Current Crisis in Cyprus

Abstract

The Cypriot banking system has suffered a severe blow last Friday night, after the results of the Eurogroup meeting were announced. Life in the banking system is different since Saturday morning: solutions that were feasible until last Friday (e.g. bank resolutions) might not be feasible this week due to capital flight risk. Moreover, the economics profession perhaps owes some gratitude to Cypriot parliamentarians who, on Tuesday, rejected a bailout package that would impose a levy on both insured and uninsured deposits. Insured deposits are sacrosanct in developed financial markets and breach of that trust is the main error the Eurogroup committed last Friday. We offer a proposal for the resolution of the crisis in Cyprus that provides a solution minimizing the losses to the banking sector and the economy in general, under the current circumstances.

Keywords: Cyprus crisis, Cyprus bailout, insured deposits, deposit insurance

JEL Classification: E51, E52, E53, E58, F33, F34, G2, G21, G33