Cyprus Closes Banks Until Next Week as Fear of Runs Continue

Cyprus Closes Banks Until Next Week as Fear of Runs Continue
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Cyprus is reportedly keeping banks closed until next Tuesday in order to allow the government time to pass a bailout deal that will likely see money taken from the country’s ordinary depositors. The reason behind the closure is clear. If Cyprus’ banks were to open today they would be empty by tomorrow, as most would rather avoid a once-off tax on their savings.

Cyprus Closes Banks Until Next Week as Fear of Runs Continue

The problems for Cyprus are clear, but the ramifications on the rest of Europe remain less than obvious. Banks across Europe are still open, and there have not been instant ramifications, or banks runs, for financial institutions across Europe. The Cyprus question still weighs heavily on Europeans, however, if depositors can be taxed in Cyprus, why not in Spain or Italy?

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The reason that bank runs have not started in other European countries is likely due to the remoteness of Cyprus, and the lack of any serious European crisis in recent months. Cyprus is far away for Europeans, but its lessons will be learned by Europeans.

Alistair Darling, the former Chancellor of the United Kingdom, believes that the effects of the bailout deal in Cyprus will have dire effects on Europe. In a BBC program, Mr. Darling said, “It seems to me to make it more likely that if you’re a saver in Spain or Italy, if you have a sniff of the EU or the IMF coming your way you’ll take your money out and you’ll get a run on the bank.”

It is the shadow of the IMF that, more often than not, really brings a crisis mentality to European citizens. Judging by the current economic and political climate, particularly in Italy, the continent is not finished dealing with the International Monetary Fund just yet. The next time they show up in a European country it might precipitate a run on the local banks.

Cyprus shows that Europe, despite its experience, has not yet figured out a clean system for bailing a country out. The process tends to be lengthy and it tends to leave time for depositors to act. The ECB will do its best to contain contagion from Cyprus’ problems, but the effects on the European Psyche will, more likely than not, remain indelible.

The next time the IMF shows up in a European country it will not be surprising if ATMs dry out.

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