On March 25 Euro zone banks agreed on a 10 billion euro bailout plan for the ailing Cyprus banks. The plan required Cyprus to come up with 5.8 billion of the bailout money. The original plan which was rejected by the Cyprus parliament called for a tax on all bank deposits in order to raise the money. The agreed upon plan called for a 40% tax on account holders of more than 100,000 euro.
In breaking news today the Cypriot Finance Minister, Michalis Sarris, resigned because of the crisis. In other news today hundreds of British depositors in the Cypriot Bank Laiki with deposits of over 100,000 euro were saved when their deposits were immediately transferred to a UK subsidiary of the Bank of Cyprus.
World markets and European governments reacted favorably to the bailout plan. It was a populist resolution which only affected the larger depositors in the Cypriot Banks, many of whom were foreigners taking advantage of favorable taxes and the privacy of the banks.
The question is what long term effects will the bailout have on other banking systems such as those of Italy and Spain. If confidence begins to wane in these banks, large depositors may likely pull their deposits for fear of a similar outcome thus expediting and exacerbating any crisis that may be unfolding in those countries. As world markets and governments celebrate, time will tell if their exuberance wasn't just a bit premature.
