Europe has arrived at the best available remedy for Cyprus’s woes – but not without first trying every other option and nearly letting a tiny peripheral economy shatter the monetary union. The deal agreed early on Monday, especially the tortuous route by which it was secured, sets profound precedents for eurozone banking and finance, in some ways for the worse, in others for the better.
Few in Cyprus may agree, but the island state has got the best deal it was entitled to expect. This was not the morality play rolling across media bulletins that paint the country as an innocent victim of European highhandedness. It chose a high-risk strategy of living off a banking system far bigger than the state could support. Two years after Nicosia lost market access, the banks still have books seven times Cyprus’s annual economic output. Even proportionately small losses are unaffordable for the state to make good.
A metastasised banking system sucked in more funds than it could usefully deploy at home. Beyond fuelling a housing bubble, Cypriot banks recycled funds to Russia and other origins, and made a big bet on Greek sovereign bonds. In the event, Athens’s restructuring killed the Cypriot banking sector. But the choice to hitch the economy to offshore banking was made with the complicity of leaders and the acquiescence of a population content to live beyond its means.