Earlier this week, Dutch Finance Minister Jeroen Dijsselbloem, who serves as head of the Eurogroup, said Cyprus may serve as a model for future bailouts. Europe’s stock markets and the euro headed south, prompting Dijsselbloem to issue a terse, 37-word statement clarifying that “Cyprus is a specific case” and future adjustment programs will be “tailor-made” for each country.
So which is it? Euro-zone depositors must be wondering. Investors didn’t wait for the answer. The Euro Stoxx Banks Index lost almost 4 percent on March 25 and 6.8 percent so far this week.
Hannan, of the European Parliament, wonders why Cyprus doesn’t “copy Iceland, let its banks collapse, and leave their shareholders and bondholders to sustain the loss.”
That’s exactly what Cyprus is doing—- without a possible offset from currency devaluation.
Like Cyprus, Iceland’s banking system had grown to be many times the size of the nation’s economy. When short-term funding dried up during the 2008 financial crisis, Iceland nationalized the domestic units of its banks, imposing losses on foreign creditors. The krona lost 80 percent of its value versus the euro.
Today, Iceland’s economy is recovering, thanks to a weaker currency, fiscal consolidation and accommodative monetary policy. Capital controls have yet to be lifted.
It’s not clear how Cyprus will manage without the flexibility Iceland had. Cypriots may tire of waiting to see how things play out -—and opt to write a different ending for their country.
Act I of this drama dealt with the negotiations and manipulations leading up to the creation of the European monetary union. Act II was the realization. Act III, which is still being written, is certain to test the viability of “No Exit.”
Caroline Baum, author of “Just What I Said,” is a Bloomberg View columnist.