by (Originally published 20 March 2013)
In a posting at the Guardian, Costas Lapavitsas compares the banking crises in Ireland, Iceland, and Cyprus, claiming that “Ireland followed a certain path, determined by the troika and membership of the EMU”, and that “[t]he deal currently offered to Cyprus by the troika is along the path of Ireland”, whereas “Iceland followed a radically different path, as it is free of the troika and not a member of the EMU.”
I submit that, while there is a great deal of similarity between the cases of Ireland and Cyprus– and difference from that of Iceland — such similarity has little or nothing to do with the EU.
The EU, or the ECB, or the troika, are convenient whipping boys for European politicians and commentators, and sometimes deservedly so, but this does not seem to be one of those times.
In the case of Ireland, it was Ireland (or the sitting Irish government at the time) that created the problem. Its banks were badly run with poor oversight, which — not surprisingly — led to trouble when the financial bubble burst. In the face of this trouble, the Irish government chose not to let the banks fail or to restructure them, but instead to guarantee all lending to Irish banks, without limitation to the EU-standard of EUR 100,000. The result was that, when the banks could not honor their debts, the Irish state was responsible for them.
The role of the EU in this matter was limited to insisting that the Irish state honor the commitments it had made in choosing to guarantee all bank debt.
The case of Cyprus is similar. The role of the trioka has been to offer a loan of “only” 10 thousand million euros, arguing (reasonably, in the opinion of many) that a loan almost equal to Cyprus’s entire GDP is not realistic. The details of the agreement arrived at, with small as well as large depositors being required to pay, were at the insistence of the Cypriots, not the troika.
Certainly Cyprus could have acted similarly to Iceland, by restructuring their banks and/or putting the costs onto the large depositors (those accounts above the EUR 100,000 guarantee level), but the Cypriots chose a different course. Perhaps the Cypriots felt that putting the costs on large depositors would put at risk the flow of money into and through Cyprus, and that it was important to preserve the contours of their banking system. But that was a choice the Cypriots made.
