This crisis is only beginning and omens for Europe are bleak
AS finance ministers, EU chiefs and IMF bosses gathered in Brussels last night, just about the only thing that could be said with any certainty was that the Cyprus crisis was just beginning – and perhaps another euro crisis as well.
If anything, the situation is more troubling than a week ago; with the bizarre idea that depositors in one bank should be levied more heavily than in others; that at least one bank would be wound up; and that there would be restrictions on the movement of money in what is supposed to be a monetary union.
It is not clear that it had to be this big a mess, but there are several uniquely tricky features to the Cyprus question.
One is the sheer scale of the banking system relative to the economy. The infamous Irish guarantee of €400bn in bank assets amounted to an impossible three years' national income. But the Cypriot banks have assets equalling seven years' national income, which makes even a punitive Irish-style rescue out of the question.
It also seems highly unlikely that the proposed €16bn bailout will be enough. Yet any significant amount more will bankrupt Cyprus.
This brought into play another complication – that the IMF cannot lend money which has no chance of being repaid. That led directly to the crisis because the Cypriots had to find €6bn of their own, and tried to do it by taxing bank deposits.
It would appear that this bailout will be as far as the IMF goes, but that won't be enough for Cyprus. One reason to fear a renewed euro crisis is the doubt over whether European governments will lend Cyprus any more money either.
The immediate problem is to avert the collapse of the Cypriot banking system, and perhaps an exit from the euro, in the next few days.
The sums of money involved are small on a European scale, but the principles and consequences are gigantic. Here at home, the €15m loss facing credit unions from the liquidation of the former Anglo Irish bank is a chilling reminder of what it means for banks to fail and be unable to pay their debts.
The Cyprus disaster may yet elicit some sympathy for the Fianna Fail government, which faced the same appalling choice – imminent disaster and start again, or carry on through years of pain.
Cyprus has been described as the canary in the mine.
A dead canary did not matter but the miners knew it meant they might all be dead soon. Europe has to heed that warning.
It has no idea what to do about its troubled banking systems, or even whether it has the resources to deal with them at all.
But nor is there a willingness to face the terrifying consequences of bank failures, with the loss of savings and loans from other banks.
We know a lot more about these dangers, having seen them play out on the streets of Nicosia, but we seem no further on in having a credible set of policies to deal with them.