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Why Cyprus Is a Special Case

The Cyprus bailout deal is a big improvement over the first botched attempt. It doesn’t repeat the error of breaching the guarantee on bank deposits up to 100,000 euros. Instead, it restructures the two biggest banks and forces their creditors, including large depositors, to take huge losses.

Yet the euro area’s leaders must do a lot more to convince Europeans and the markets that they have drawn the right lessons from this debacle. They need to say clearly why Cyprus is an exception and commit to integrating the euro area further so that it’s less vulnerable to such crises. They’re failing on both points. The head of the euro area group of finance ministers, Jeroen Dijsselbloem, appeared to draw all the wrong conclusions in a March 25 interview , after the new deal was struck. He suggested that the Cyprus pact offered a new template for resolving the debt crisis. Under this new model, the burden of repairing banks would shift from taxpayers to private creditors. Specifically, Dijsselbloem said he hoped the new approach meant that the 500- billion-euro European Stability Mechanism would never be used to directly recapitalize banks. Policy Whiplash Leaders from the wealthier northern-tier countries, including Germany, Finland and the Netherlands (Dijsselbloem is Dutch) advocate such an approach because it would avoid further transfers from north to south. This would be fine if it were possible. It isn’t — not if the euro area is to remain intact. Upon hearing Dijsselbloem’s remarks, any bondholder or depositor […]

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