Colm McCarthy: Plan B came too late to put the genie back
The threat of raiding deposits was enough to bring Cypriot banks to their knees
The ill-advised initial plan for Cyprus, which would have seen guaranteed depositors (those with accounts under €100,000) suffer losses, was finally abandoned during the week, as was the intention to hit all creditors of the banking system equally. This would, amazingly, have penalised those with deposits in banks not actually bust. Plan B sees the losses at a far higher percentage level but confined to unguaranteed depositors in the banks that are truly insolvent.
This is a better plan, but the genie of a threat to guaranteed depositors was released from the bottle and the damage has been done. It is remarkable that, at the meeting of the Eurogroup in Brussels which ended on the morning of March 16, and at which experienced officials from the IMF and the European Central Bank were present, nobody appears to have understood the damage that would be wrought by the escape of the aforementioned genie.
Partly because of the genie's escape, the Cypriot banks will not release funds to depositors at will: there are controls on withdrawals and a euro deposited in a Cypriot bank is no longer the same as a euro in any other bank in the eurozone. To that extent, Cyprus has already ceased to be fully part of the common currency area.