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By Peter Hoskin
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Huzzah!
Cyprus has been saved! Eurozone finance ministers announced last night
that they had agreed on a €10 billion bailout deal for the stricken island. The
main feature of the package is the death of a bank: Laiki, the country’s
second-biggest bank, will be divided into “good” and “bad” parts, with the
former eventually being merged into the larger Bank of Cyprus. Deposits under €100,000
will be guaranteed. But any uninsured deposits over that sum will be hit to the
collective sum of €4.2
billion
. This is being reported as a strike on mega-rich Russians with Cypriot
bank accounts, but is that wholly true? I’d like to hear more about the
affected parties before reaching conclusions.

In
any case, this is, to some extent, positive news for everyday savers in Cyprus.
Their money has been spared – and so has the Bank of Cyprus, the survival of
which was not always certain. And it’s good news, too, for the Eurocrats, for
three main reasons. First, as most of the pain is being suffered by individuals,
it’s a deal that’s likely to be politically acceptable in countries such as
Germany. Second, for a similar reason, there is unlikely to be market panic
across Europe about the idea of further expensive bailouts. And third, all this
has been achieved without taking Cyprus out of the currency union, which –
although it may
not have had much effect
by itself – could have raised the prospect of
wider break-up. The euro staggers on.

But is it all a good news story? Hmm, perhaps not. As Pawel Morski explained in an excellent post on Saturday:

“There are four shocks happening at once; the bog-standard austerity
shock; the trauma of bank withdrawal controls; the wealth shock; and the
structural shock of wiping out the financial sector. The bailout bill is
certainly going to get a 
lot higher too, as a larger amount of debt is piled
onto a smaller economy.”

All of which means that Cyprus and its people face years of
financial grief. It reminds me of what a US major is supposed to have said
about Ben Tre during the Vietnam
War: “It became necessary to destroy the town to save it” – except, from the
perspective of Brussels, Cyprus may not even have been saved. There’s still the
possibility that the country will voluntarily leave the Eurozone in order to do
what Daniel Hannan recommends:
devalue its way to growth.

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