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Cypriot Parliament Rejects European Bailout

Posted by Steve Markowitz on March 19, 2013

Yesterday we posted Cyprus Bailout Taxes Bank Deposits that reviewed the proposed bailout of Cypriot banks by the European Union.  The entire banking system in Cyprus is insolvent and requires a bailout from the European Union, which means from Germany.  Germany has a case of bailout fatigue after the bailouts of Ireland, Greece and Portugal.  Prior to agreeing to the proposed Cypriot bailout, the EU placed some unique demands on Cypriot bank depositors in the form of taxing the deposits.

Today the Cypriot Parliament not surprisingly rejected the bailout plan with not one politician voting in favor of it.  Even if taxing bank deposits was reasonable, no politician could survive in a democracy by agreeing to such terms.

The European Union and its Central Bank should have understood the political realities of their proposed Cypriot bailout, but instead with arrogance proposed a plan that could not be approved by the government.  There is a more dangerous aspect to this error than merely bad judgment.  Should depositors in other European banks fear for the safety of their deposits, contagion could result in runs on banks far outside of Cyprus.  Should that type of panic begin it is hard to determine where will end.

It would not be surprising to see upward pressure on the price of gold as a result of the Cypriot bailout fiasco.

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