Should the Fed Bail Out Cyprus?

A blog about business and economics.
March 18 2013 9:09 AM

A Cyprus Thought Experiment

163874261
A man in Nicosia, Cyprius, on Sunday

Photo by Barbara Laborde/AFP/Getty Images

For background on the Cyprus banking crisis that emerged over the weekend, see here and here and especially these two posts from Pawel Morski. But back up and superficially at least the issue here is that Cyrpus needs 5.8 billion euros more than "the Germans" (some of whom in this case seem to be Finnish) feel like ponying up. So suppose Ben Bernanke is looking at financial markets and decides it would be perverse for there to be hundreds of billions worth of stock market declines around the world for want of 5.8 billion euros. He could have the Federal Reserve print up some dollars to purchase 5.8 billion euros or (5.8 billion euros worth of Finnish, Slovakian, Austrian, Dutch, German, Belgian, and French debt) and then deliver the money as a gift to President Nicos Anastasiades and tell him his problems are solved.

Nobody needs to lose anything. Of course people might ask Bernanke what kind of precedent this sets, but he could just say it's really not clear. It was a weird situation, and Cyprus is freakishly small. You can't necessarily expect the same thing to happen next time, so who knows. Plus, he might get impeached over it.

But economically, what's the downside here? Would we see runaway price inflation in the United States if the Fed handed 5.8 billion euros over to the government of Cyprus to prevent the haircutting of bank depositors? It's difficult to see how that would happen. Would you see runaway price inflation in Cyprus? Again, hard to see. Now you probably wouldn't really "save" Cyprus this way anyway. Russian tax cheats or whomever it is who's putting money in these offshore Cypriot accounts are probably going to be looking for a new safe haven no matter what happens. So Cyprus will have to cope with that over and above whatever other problems are afflicting it. But obviously Cyprus is better off with the present. And while I don't believe the hype about contagion to Portugal, Ireland, Italy, and Spain, the Fed bailout clearly makes contagion less likely so the Portugese, etc., are happy. The Germans (and Slovaks, who've been itching for a fight since Greece) will be superficially upset that they lost their chance to deliver some Old Testament justice, but it's difficult to see how they've lost out here.

Advertisement

The euro might move up against the dollar (back to where it was a month ago, say) rather than moving down in the bailout scenario. But I'd judge that as good for the U.S. (exports, and all that), as well as a nice vote of confidence in the European Project.

Of course it "sounds crazy," so it won't happen, nor will the "even crazier" alternative of Secretary Jack Lew minting a $8 billion platinum coin and mailing it to Nicosia. But it seems like a fine idea nonetheless.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Medical Examiner

Here’s Where We Stand With Ebola

Even experienced international disaster responders are shocked at how bad it’s gotten.

U.S. Begins Airstrikes Against ISIS in Syria

The U.S. Is So, So Far Behind Europe on Clean Energy

It Is Very, Very Stupid to Compare Hope Solo to Ray Rice

Friends Was the Last Purely Pleasurable Sitcom

The Eye

This Whimsical Driverless Car Imagines Transportation in 2059

Politics

Meet the New Bosses

How the Republicans would run the Senate.

A Woman Who Escaped the Extreme Babymaking Christian Fundamentalism of Quiverfull

How in the World Did Turkey Just Get 46 Hostages Back From ISIS?

  News & Politics
Politics
Sept. 22 2014 6:30 PM What Does It Mean to Be an American? Ted Cruz and Scott Brown think it’s about ideology. It’s really about culture.
  Business
Moneybox
Sept. 22 2014 5:38 PM Apple Won't Shut Down Beats Music After All (But Will Probably Rename It)
  Life
Outward
Sept. 22 2014 4:45 PM Why Can’t the Census Count Gay Couples Accurately?
  Double X
The XX Factor
Sept. 22 2014 7:43 PM Emma Watson Threatened With Nude Photo Leak for Speaking Out About Women's Equality
  Slate Plus
Slate Plus
Sept. 22 2014 1:52 PM Tell Us What You Think About Slate Plus Help us improve our new membership program.
  Arts
Brow Beat
Sept. 22 2014 9:17 PM Trent Reznor’s Gone Girl Soundtrack Sounds Like an Eerie, Innovative Success
  Technology
Future Tense
Sept. 22 2014 6:27 PM Should We All Be Learning How to Type in Virtual Reality?
  Health & Science
Medical Examiner
Sept. 22 2014 4:34 PM Here’s Where We Stand With Ebola Even experienced international disaster responders are shocked at how bad it’s gotten.
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.