It's All Greek to Me: Cyprus, Next on the EU Dole

Erm, on second thought, let's not call it a "bailout" but a "bank recapitalization programme" to use the sort of euphemisms Spanish officials prefer as they too succumbed to the inevitable when you have overextended banks. To be sure, there are differences among [i] a balance-of-payments crisis (in which case the IMF would have been functioning in its more classic lender of last resort role), [ii] a fiscal crisis (in which case the government has taken on too much debt and cannot meet its repayment obligations) and [iii] a banking crisis (in which case your banks don't have enough spare cash to stay afloat after loans they've made that have gone bad). For the latter, it's to the EU you go such as with the case of Ireland or most recently Spain. True, BOP, fiscal and banking crises tend to occur simultaneously and cause confusion as to the underlying nature of the problem, but true connoisseurs of financial implosion such as readers of the IPE Zone should care about such differences. 

Today we line up another sucker of EU emergency funds in Cyprus. Based on the classification I have given above, its most pressing problem is [iii]. However, this occurrence is blowback from Greece's own woes which stem from [ii] during a period in which the Cyprus has been running large fiscal and current account deficits, too. Confusing, no? Remember that a lot of Cypriot's residents are of Greek descent. Plus, with a significant financial services industry by Eastern Mediterranean standards, it was only natural that its banks lent to many Greek concerns, all the while stocking up on Greek sovereign bonds. Having gorged its citizens on credit as well in that post-EMU accession euphoria alike many troubled economies doesn't help. The end result? Cyprus was made quite vulnerable to Greek default and its subsequent haircuts, the endgame of which is nearly upon us:

Cyprus said that it urgently needed European financial aid to boost its banks' capital, a step that would make it the fifth euro-zone economy to seek help from the region's bailout funds. Cyprus Finance Minister Vassos Shiarly said that the country's need for an international bailout was "exceptionally urgent" in order for it to recapitalize its banks, and that the issue would need to be resolved by the end of the month.

According to several European officials, the size of any bailout would be unlikely to exceed €3 billion to €4 billion ($3.8 billion to $5 billion), a sum that wouldn't strain the resources of the euro zone's bailout funds. The economy of Cyprus—an island of 800,000 people—is 1/60th the size of the economy of Spain, which said over the weekend that it would seek European funds to recapitalize its own banks.

What Cyprus will be seeking is a deal similar to that of Spain: as few as possible IMF-style conditionalities on how governments run their affairs but more EU discretion on restoring their banks' soundness--which again points to Cyprus' situation being a banking crisis first and foremost. Further, it will be interesting to see how this divided nation split between those of Greek and Turkish descent cope with resorting to the EU poorhouse. Clearly, many of the current woes stem a lot from the Greek faction, so finger-pointing naturally inflames longstanding tensions between Greek and Turkish Cypriots who still don't get along for the most part.