LET THE CYPRUS BANKS GO BANKRUPT !

The crisis in Cyprus is fundamentally a banking crisis . So Cyprus was presented with a solution , which was no solution at all. It was told that it had to do two things : to borrow an enormous amount of money relative to the economy in order to refinance the banks and  some more money had to be found through taxing the deposits--in other words, by imposing a levy on the deposits. The combination of these two measures will simply destroy the economy. Taking on the debt to rescue the banks will make public debt in Cyprus unsustainable, or very large, in any case, and it will impose austerity and everything else on the economy to deal with the public debt. It will basically transform the private debt of the banks into a public debt of the state, and it will ruin the economy in the process. The other part of the equation, which is finding the money by imposing a levy on bank accounts, will also destroy the banking system, because, of course, depositors will take their money and run, and they will object to having their money taxed in spite of guarantees.

Cyprus has reached the stage where a bank run, when the banks reopen, if they reopen, is almost inevitable. The first thing that everyone will do whenever the banks open will be to rush to the banks to get their money out. If that happens, the banks are finished.

Already the Cypriot government has decided to shut down one of the banks, one of the weakest banks (Popular Bank of Cyprus) The bank is basically bankrupt. The money isn't on the table to rescue it. The depositors know that this is the case. It's nearly impossible to prevent a run on it if it reopens.

Cyprus needs to take drastic action and radical action immediately if it wishes to turn its economy around and solve this problem. This means that Cyprus must shut down its banks.  It must protect the depositors who put their savings in the banks. And it must allow large bondholders, shareholders, and large deposit holders, Russians or whoever else it is, to take a hit. And the domestic economy must be protected.

It's very, very important to protect the domestic economy especially the small deposit holders and businesses. This means allowing the banks to go bankrupt and re-creating, quickly, new banks under public ownership from the ruins of the old banks. It is the only way in which this issue can be resolved without causing whole scale destruction of the economy. Of course it'll be a shock for the economy, but that's the only way. Now, what it means at the macro level is, of course, that Cyprus must not have austerity. It must go for a different strategy of boosting the local economy to, at the very least, counterbalance the shock of contracting the banks. It must also take whatever action it can to reenergize the productive sector, which is very weak. Cyprus primary concern must be not to ruin the economy in order to rescue the banks.

When the banks reopen on Tuesday, if they reopen on Tuesday, expect chaotic scenes !