March 18, 2013 5:04PM 

# Cyprus: Follow the Money 

By [Steve H. Hanke](https://www.cato.org/people/steve-h-hanke) 

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While the Cypriot Parliament may be [dragging its feet on a proposed rescue plan](http://www.reuters.com/article/2013/03/18/us-cyprus-parliament-idUSBRE92G03I20130318) for Cyprus’ banks, the country ultimately faces a choice between Brussels’ bitter pill…and bankruptcy. Cyprus’ newly-elected President, Nicos Anastasiades, has quite accurately summed up the situation:

> “A disorderly bankruptcy would have forced us to leave the euro and forced a devaluation.”

Yes, Brussels and the IMF have finally decided to come to the aid of the tiny island, which accounts for just 0.2% of European output — to the tune of roughly $13 Billion. But, this bailout is different. Indeed, the term “bail-in” has emerged, a reference to the fact that EU-IMF aid is conditional upon Cyprus imposing a hefty tax on its depositors. Not surprisingly, the Cypriots, among others, are less than pleased about this so-called “haircut”.

Still, the question lingers: Why now? The sorry state of Cyprus’ banking system is certainly no secret. What’s more, the IMF has supported a “bail-in” solution for some time. So, why has the EU only recently decided to pull the trigger on a Cyprus rescue plan?

One reason can be found by taking a look at the composition of Cyprus’ bank deposits (see the accompanying chart).

![Media Name: cyprus_blog_chart.png](/sites/cato.org/files/styles/pubs_2x/public/wp-content/uploads/cyprus_blog_chart.png?itok=Xx6aA0u8) 

There are two main take-aways from this chart:

1. European depositors’ money began to flow out of Cyprus’ banks back in 2010. Indeed, most European depositors have already found the exit door.
2. Over that same period, non-Europeans (read: Russians) have increased their Cypriot exposure. If the proposed haircut goes through, Russian depositors could lose up to $3 billion. [No wonder Valdimir Putin is up in arms about the bail-in](http://www.globalpost.com/dispatch/news/afp/130318/putin-pounds-unfair-dangerous-cyprus-deposit-tax).

Perhaps a different “red telephone” from Moscow will be ringing in Brussels soon.

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