Sunday marked the anniversary of Cyprus’ shock plan to raid the tiny island’s bank deposits. The envisaged tax, backed by the euro zone, covered all banks and all deposits, whether insured or not.
Although that unwise scheme was later rescinded, much damage was done to a country already deep in financial crisis. Uninsured deposits of the island’s two large troubled lenders still suffered big haircuts. Capital controls were imposed as well.
These restrictions were supposed to be a short-term measure, not that this ever seemed likely. A year on, the most important controls – preventing people or companies taking more than small sums of money out of the country – are still in place and depressing the economy’s animal spirits.
Cyprus bears most of the blame for its predicament. But the euro zone is also culpable, as it connived in the proposed deposit grab and went along with other bad decisions too. It should now offer a helping hand, principally by enabling the lifting of capital controls.
The good news is that the Cypriot economy shrank “only” 5.4 percent last year. The troika – the European Commission, the European Central Bank and the International Monetary Fund – had initially projected a drop of nearly 9 percent.