Cyprus bailout crisis sparks run on banks

Banks on the run with financial shockwaves spread across European Union after depositors are forced to bail out banks whose assets became too big for Cypriot economy

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A customer of the Bank of Cyprus carries out a transaction at an ATM machine outside a branch in Athens. Greek branches of Cypriot banks will remain shut today, in line with Nicosia's plan for a two-day bank holiday. Photo: Reuters

Published: 12:00am, 20 Mar 2013Updated: 4:54pm, 14 Jun 2018

The European Union finally decided to force Cyprus' savers into a bailout after the tiny Mediterranean island's banks grew so large that they dwarfed its economy - a situation alarmingly similar to Iceland five years ago.

By the end of January, bank assets in Cyprus had swollen to €126 billion (HK$1.26 trillion), seven times larger than its gross domestic product, data from the EU and European Central Bank shows. The banks had just €78 billion in 2007.

The similar imbalance in Iceland had proved to be a harbinger for the European financial crisis. Back then, Iceland's banks were no longer able to finance a debt 12 times the size of GDP and Reykjavik stepped in to seize control.

After Cyprus' banks lost €4.5 billion on Greek sovereign debt and failed to meet European capital requirements, the Cypriot government was compelled to take action itself.

Over the weekend, Cyprus announce a €5.8 billion bailout plan, including, most controversially, a big charge on small deposits that were supposed to be guaranteed by its deposit insurance scheme.

"The banks grew as they amassed funds from wealthy foreigners and now that size is too much for the country to handle on its own," said Philipp Haessler, a European banks analyst at Equinet in Frankfurt. "Cyprus is being made an example of."