The Week Ahead Cyprus is another verse of old song

March 23, 2013 

Cyprus is another verse of old song

Imagine if your bank account was threatened with a 10 percent loss. Not from a cyber thief or the taxman but from the bank itself. That was the idea rejected last week by the Mediterranean island country Cyprus. As the decision loomed, banks shut down to head off a cash run. They won't open before Tuesday.

When they reopen, the world will witness -- again -- the real consequences of lost confidence in a banking system. Let it serve as a reminder of the fragile state and interconnectedness of finance around the world.

The core problem in Cyprus is not complex. Lax banking regulation, an appetite for risk, putting short-term gains over long-term stability and hubris combined with little transparency to bring big problems to this tiny country. Here's how it worked: Russians looking for shelter poured money into Cypriot banks. Those banks used the money to buy Greek government bonds. They were attracted by higher interest rates, and Cyprus bankers were confident Greece had a handle on its own financial mess. When Greece couldn't pay its IOUs, that left the banks holding the bag. Now those problems extend far beyond.

If all this sounds vaguely familiar, it is. Iceland and Ireland have each dealt with similar circumstances. Though the details differ, each country found its banking system essentially insolvent. Taking their lumps early helped repair their financial systems faster than has been the case in other troubled hot spots.

Tom Hudson, a financial journalist based, is in Miami. He is the former co-anchor and managing editor of "Nightly Business Report" on public television.

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