Cyprus: Make a model of it, not a mess | The Economist

Rather than haggle between these two unappealing alternatives, Europe’s policymakers should think more boldly. Cyprus’s bank bail-out should not go through its government at all. Instead, rescue funds should flow directly into restructured Cypriot banks. This would kick-start a new, safer European banking model, one which breaks the pernicious link between bust banks and bankrupt governments. Each bank should be dealt with on its merits, but as a condition for any capital injection shareholders and junior bondholders should be wiped out (and negligent bosses removed). The thorniest issue in Cyprus is the uninsured depositors. At some stage Europe should have laws that force them to lose money in a bust. But, given the risk of precipitating panic elsewhere, this newspaper does not advocate writing them down now.

Last June Europe’s politicians agreed that rescue funds could be used to recapitalise banks. Ever since then several countries, including Germany, have tried to wriggle out of that commitment. Europe’s leaders claim they want to move towards a banking union. Cyprus should be the first step.

Cyprus: Make a model of it, not a mess | The Economist.

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