Make Banks Pay for Their Own Mistakes


The $30 billion bailout of Cypriot banks that began in March is the latest in a series of high-stakes financial rescues in Europe. Philip Booth of the London-based Institute of Economic Affairs offers three lessons from the Cyprus bailout and the broader euro-zone crisis. 

1 Taxpayers shouldn't pay. The major characteristic of recent debt crises—sub-prime, the problems in euro-zone banks, and the various government debt crises—is that individuals and financial institutions have lent money that will not be repaid. The question is who should suffer when this happens. It should be those who lent the money and not taxpayers in general. We should not print money to bail out the banks.

2 Banks, bondholders, and depositors should take the first hit. There are a few signs in the management of the Cyprus debt crisis that we may gradually be learning the lessons of early bailouts. The banks' equity and bondholders should be wiped out first, and then depositors should take the next hit. That is happening in Cyprus to a degree.

3 Cyprus shouldn't be bailed out by the euro zone. It is not necessary to save the Cypriot banking system to save the euro zone. When bad investment decisions are made, bad debts have to be recognized. Simply socializing those debts is bad economics and patently unjust.