Saturday, March 05, 2016

Partitioned islands and their banks

During 2008-10, policy elites in Ireland were paralyzed by the idea that restructuring the debt of its busted banks would necessitate taking a chunk out of deposits as well. That's a long and separate story but Cyprus ended up being the case study of what happens when deposits become part of the restructuring. And here's its finance minister Harris Georgiades in an interview with the Wall Street Journal giving a fairly accurate account of what ensued --

The view that when the banks collapse the country’s economy will collapse was never substantiated. We preserved everything that was healthy, and we fixed--and we are still fixing--what was problematic.

There were some chaotic months of cash shortage and loss of wealth. But the economy didn't collapse. And as the inconclusive Irish election shows, working within the constraints of risk-averse policy preferences on this issue is not even politically rewarding.

The lesson: don't get spooked into thinking of debt as sacred. Sins can be forgiven.

UPDATE: Cyprus exits its IMF program ahead of schedule!

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