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7 Things You Need to Know About the Shocking Cyprus Bailout Crisis That Has Everyone Freaked Out

Fears of bank runs, a Lehman-like collapse, and widespread panic are building.
 
 
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Editor's Note: The parliamentary vote on the bailout has been delayed until Tuesday.

In a small island nation far, far away, the financial shit is hitting the fan. A new bailout package in the euro zone comes with terms that are causing a tsunami of anxiety across Europe and beyond. Here’s what’s happening and why it matters.

1. What the heck is going on?

Since 2008, the Greek economy has gone from bad to worse. As Greece’s economy collapsed, the European and Greek banks that held the nation’s debts should have been told to eat their losses, write off the debts, and replace their managements. Instead, the European Union stepped in to engineer one bailout after another. The prices for the bailouts were high: austerity policies that didn’t work. The result everywhere is that national income has fallen steeply, while the countries fall further into debt.

Cypriot banks got into trouble from their exposure to neighboring Greece. Finance ministers from euro countries and representatives from the IMF and the European Central Bank came up with a radical plan for a bailout to Cyprus’ banks: In exchange for €10 billion ($13 billion) in rescue money, creditors would impose a one-time tax of 6.75 percent on all bank deposits under €100,000 ($131,000) and 9.9 percent over that amount, while Cyprus cut government spending and raised revenues. The decision to make depositors pay was a stunning departure from past EU-led bailouts.

On Saturday, freaked-out bank customers rushed to ATMs to withdraw as much of their cash as possible. The Cyprus government announced a bank holiday on Monday (a national holiday) and temporarily halted all electronic bank transfers. The bank holiday has now been extended until Tuesday.

The Cypriot Parliament was originally supposed to meet on Sunday to vote on the deal, but the vote has been postponed until Monday. Cypriot officials fear a full-on bank run once lenders reopen their doors.

2. Where would the money go?

Money obtained through the one-time tax would go to recapitalize Cyprus banks and service the country's debt.

3. Who would get hit by this deal?

Bank owners, unsurprisingly, are not being asked to pay into the package. Bank depositors are. This number includes ordinary Cypriots, British pensioners, and others who have their money in the banks, including a large number of wealthy Russian and Middle Eastern depositors. The depositors have been promised bank shares in exchange for the money that gets grabbed. But, um, who wants shares in banks that are in the financial toilet? Exactly no one. There has also been chatter that depositors will be given some kind of interest in bonds from gas fields presumably controlled by Cyprus.

4. Who wants the bailout?

The European Central Bank, the IMF, and the EU are the ones pushing this deal. Cyprus President Nicos Anastasiades says he doesn’t like the deal and claims to be trying to soften it so that depositors with small accounts don’t get hit so hard.  

5. Who opposes it?

Depositors hate the deal, obviously. Most of the population of Cyprus correctly believes they are being asked to pay for the sins of the banks. Well, “forced” is a better term, because no one’s really asking. According to the Wall Street Journal, one incensed resident of the town of Limassol parked a backhoe in front of a local bank to express the widespread sentiment about the deal.

6. What’s at stake?

Unfortunately, this is going to be ugly any way you slice it. On Monday, if Cyprus’ Parliament says no to the deal, there will be chaos because everybody will think the banks are belly up and there will be a bank run. That could be something like Lehman Brothers, meaning chain bankruptcies and panic throughout Europe.

On the other hand, if Parliament takes the deal, then a rescue will happen, but under terms that put everyone at risk. The message will be out that depositors in the euro zone can get hit and people in Italy, Spain and Greece will be particularly freaked out. The possibility of a bank run in those countries will grow.

7. How will America be impacted?

International banks like Bank of America and JPMorgan Chase are part of global networks. But deposits in American banks up to $250,000 are insured by the Federal Deposit Insurance Corporation. While banks pay something for their ordinary participation in this program, ultimately it is Uncle Sam – meaning you and me – who are on the hook when the FDIC needs backstopping. So our too-big-to-fail banks look set to profit from the federal government they love to denounce, as anxious depositors around the world move money into insured US banks.

Lynn Parramore is an AlterNet senior editor. She is cofounder of Recessionwire, founding editor of New Deal 2.0, and author of "Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture." She received her Ph.D. in English and cultural theory from NYU. She is the director of AlterNet's New Economic Dialogue Project. Follow her on Twitter @LynnParramore.