The first attempt to bail out Cyprus was such a shambles that the second looks smart by comparison. It’s getting generally favorable press, too — the best available option under the circumstances, and so on. Yes, it’s an improvement. It’s hard to think of anything that wouldn’t be. That doesn’t make it a good plan.
The new deal has removed the craziest part of the agreement reached March 16 — the plan to default on deposit insurance . Let’s not dwell any further on that insanity . But the new plan still has features that, seen in any other context, would surely arouse surprise. For instance, the so-called troika of the European Commission, the European Central Bank and the International Monetary Fund wanted to be sure that the new debt Cyprus is about to take on will be sustainable — meaning, presumably, that Cyprus will be able to repay it. Yet, by writing down high- value deposits, the revised plan will also cause a sudden contraction of the Cypriot banking system, and thus of the whole Cypriot economy, which depends on banking to an unusual degree. IMF Projections Those debt projections of which the IMF is so fond? The arithmetic that invested 5.8 billion euros ($7.4 billion) of deposit taxes (to curb the need for new borrowing) with such awesome significance? Forget them. The denominator in the debt ratio is gross domestic product, and Cypriot GDP has just been programmed for precipitous decline. While the IMF was fiddling with […]