Cyprus Should Follow Iceland on Banks, Institute Advises

Cyprus should follow Iceland’s example in dealing with its banking crisis by refusing to safeguard some overseas deposits, the Washington-based Peterson Institute for International Economics said.

If Cyprus decides to protect 84 billion euros ($112 billion) held by domestic and European Union depositors, that would still leave more than 30 billion euros from non-EU deposits and other creditors “vulnerable to losses,” Jacob Funk Kirkegaard, a senior fellow at the institute, said in a note today. That could ensure Cyprus doesn’t add 10 billion euros of public debt to bail out its banks, he said.

“There is no compelling reason for Cypriot taxpayers to be stuck with this enormous bill,” Kirkegaard said. “To the extent that they are, it will represent a political choice, rather than financial necessity.”

Cypriots go to the ballot box on Feb. 24 to choose a leader who will need to steer the country away from financial collapse. The incoming president will have to revive talks with the European Union on a financial support package after the country’s banks took losses on Greece’s debt restructuring last year.

Iceland, which had its credit rating raised to BBB from BBB- by Fitch Ratings on Feb. 14, guaranteed its own depositors while refusing to protect those from overseas when its banks defaulted after its 2008 financial meltdown.

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