Cyprus is poised for the second-largest bank bailout since 1970


The Bank of Cyprus headquarters in Nicosia. (FLORIAN CHOBLET/AFP/Getty Images) 

The Financial Times obtained, on Monday afternoon, a copy of the draft deal for bailing out Cyprus's troubled finance sector. The Mediterranean island nation, the entire economy of which is worth 18 billion Euros, apparently requires 10 billion Euros to recapitalize its banks. For a bank bailout, that's not a particularly high sum, but when measured as a proportion of the country's gross domestic product, it's a staggering 56 percent. And by that measure, according to data from the IMF, it is the second-largest bank bailout since 1970 – and, The Atlantic's Matthew O'Brien argues, probably ever.

Cyprus's bailout talks are, largely as a result of the enormous proportion of GDP at stake, getting complicated. Here's the Financial Times:

Cypriot sovereign debt is already at almost 90 per cent of GDP. The bank rescue, plus additional cash that will be lent to run the Cypriot government, will take that debt to levels the International Monetary Fund has, in the past, argued is unsustainable.

The proposed deal asks for Cyprus to sell off ("privatise") government assets to raise money, but that could be a tough sell given that Cypriot President Demetris Christofias is a communist. I don't mean that as a slur – he is literally a self-identified communist, the first and only such head of state in the European Union. But, however the deal shakes out, the point is that, as a proportion of national GDP, it is surpassed in size only by Indonesia's 1997 bailout. According to the IMF, that one cost $56.8 billion, or 57 percent of GDP. The Indonesian economy cratered but, 20 years later, it's growing quite rapidly. By comparison, if the U.S. economy were bailed out to the tune of 56 or 57 percent, it would cost more than 7 trillion dollars.

Maybe most striking about this is the number of these enormous bank bailouts in the last few decades: O'Brien ticks through the Latin American crises of the 1980s, East Asian crises of the late 1990s, and now the European crises since 2008. He also offers this remarkably concise and straightforward definition of how, exactly, this sort of disaster happens in the first place:

Money flowed into an it-economy and that pushed asset prices up. But then the animal spirits went into hibernation. Investors worried that the boom had gone too far, and race to pull out their money -- and paper profits -- before everyone else could. In other words, a bank run on the country. The economy, and asset prices, collapsed, the latter leaving banks underwater.

This is the debt-crisis-prone world we live in, "where money moves across borders in search of the best return," O'Brien writes, although "there hasn't been much to insulate [countries] from the booms and busts of hot money inflows and outflows." So, who's next?

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Max Fisher · December 3, 2012