Imagine if your bank account was threatened with losing 10 percent. Not from a cyber thief or the taxman but from the bank itself. That was the idea rejected last week by the Mediterranean island country Cyprus. As the decision loomed banks shut down to head off a cash run. They won’t open before Tuesday.
When they reopen, the world will witness — again — the real consequences of lost confidence in a banking system. Let it serve as a reminder of the fragile state and interconnectedness of finance around the world.
The core problem in Cyprus is not complex. Lax regulation, an appetite for risk and putting short term gains over long term stability combined with little transparency to bring this tiny country big problems.
Here’s how it worked; Russians looking for shelter poured money into Cypriot banks. Those banks used the money to buy Greek government bonds. They were attracted by higher interest rates and Cyprus bankers were confident Greece had a handle on its own financial mess.
When Greece couldn’t pay its IOUs that left the banks holding the bag. Now those problems extend far beyond its shores.
If all this sounds vaguely familiar it is. Iceland and Ireland have each dealt with similar circumstances. Though the details differ, each country found its banking system essentially insolvent. Taking their lumps early helped repair their financial systems
Tom Hudson is a financial journalist based in Miami. He is the former co-anchor and managing editor of Nightly Business Report on public television.