Cyprus: What’s different?

A correspondent who heard my comments on Cyprus on KUOW’s Weekday program today asks:

I am puzzled by some of your comments this morning. As I understand it, when a bank in the U.S. fails, the FDIC moves in and closes it. The accounts are protected by insurance up to a certain limit ($100k? $250K?) [the FDIC limit is $250K per account].  How is this different than what is now going on in Cypress? Their banks have failed due to purchasing Greek bonds and other bad investments. Their smaller accounts are to remain, but the large ones will lose money. It seems similar to me. What am I missing?

I answered as follows*:

There have been six bailouts in the Eurozone since 2008:

Ireland, 85 billion Euros (48% of Ireland GDP) in 2008.
Greece, €110b, 48%, 2010.
Portugal, €78b, 46%, 2011.
Spain, €100b, 9%, 2012
Greece, €130b, 65%, 2012
Now Cyprus, €10b, 56%.

Until Cyprus, no insured bank depositor in the Eurozone has been “bailed in” or taken a haircut. The guarantee for even large accounts has been implicit, ostensibly to preserve [the illusion of] stability and unity.

And while deposits under €100,000 in Cypriot banks are still covered, the  guarantee is by a national government that is broke, busted. You can’t get all of your money out of the bank; strict limits will apply when banks open tomorrow, if they can open. Thus even an insured Euro in Cyprus today is worth less than a Euro next door. A penalty applies for lack of liquidity. This isn’t the way a common currency is supposed to work.

One way to think about it: I don’t have to worry that my deposit in a Washington bank will be worth less because a bank in Arkansas went broke. Or  because the Illinois pension fund for public employees is vastly underfunded.

A Rubicon has been crossed in the Eurozone. Depositors in Spanish and Italian banks have to be nervous. Things will never be the same. The experiment remains fragile.

Or so it seems to this self-taught economist. I’m open to ideas from others.

*amended slightly. The bailout totals are from the Financial Times.