We'll be honest: We thought we were through with the crisis in Europe, at least for a while. The continent seemed to be muddling though just fine. So we shut down our hotline to the European Central Bank and boxed up our copies of the Maastricht treaty.
But this weekend, we woke up to find we were wrong. Late night foreign minister meetings, lines at the ATMs, protests in the street — it's all back.
The crisis has emerged again in an unlikely place. On today's show: Why did the world freak out over the Cyprus bailout?
ZOE CHACE, HOST:
Here at PLANET MONEY we kind of thought we were basically done with our European debt crisis coverage.
ROBERT SMITH, HOST:
Yeah, the whole thing's played out. The continent seems to be muddling through just fine. So we shut down our special hotline we had to the European Central Bank. We boxed up our copies of the Maastricht Treaty.
CHACE: But this weekend we awoke to find it is back.
CHACE: Late night foreign minister meeting.
SMITH: Lines at the ATMs.
CHACE: Protests in the streets.
SMITH: The crisis has emerged again and this time, in an unlikely place, on a tiny island deep into the Mediterranean.
DESPINA COREY: We had to go to the ATMs and withdraw some money. And we just waited. We couldn't do anything else, just waited.
CHACE: Despina Corey is a TV journalist in Cyprus.
Cyprus is where the European crisis has shown up again. It is a very, very tiny country. It is a little bitty speck off the coast of Turkey and Lebanon. And it actually doesn't really look like it should be part of Europe. But it is where Aphrodite was born.
SMITH: Yeah, that's part of the Greek myth, yes. And it has been a roller coaster there for the past few days in Cyprus. The government has announced that in order to get a bailout from the European Union, they are going after people's bank deposits.
CHACE: Right. The money people have saved away in their bank accounts in Cyprus, the government was planning to take some of that money. If you had less than $100,000 euros in the bank, they'd take about 7 percent. If you had more, they'd take around 10 percent.
SMITH: And if you knew that someone would take money from your bank account tomorrow, you would get in line at the ATM right away.
CHACE: And - so did you stand in one of these lines on Monday morning?
D. COREY: My husband did.
CHACE: Oh, can you put him on the phone? Can you tell me what happened?
D. COREY: OK.
MICHAEL COREY: Yeah, hi.
Her husband Michael is a former television journalist also. And right now he's out of work.
M. COREY: You could see people driving up in their cars and just sitting there, you know, waiting to get in line. And people were just standing there with, you know, long faces and things. You could hear people saying - how much can I withdraw? People could get at least, you know, 200, 300 euros. You couldn't go into the bank because they declared it a national holiday so we wouldn't have a run on the bank.
So people just went to the ATM, withdrew their account and left and went home and just sat in front of the television and, you know, wondered what was going on. And we're still wondering what's going on.
CHACE: And that describes everyone in Europe at this moment. People around the world actually are watching itty bitty Cyprus. Today, Tuesday, as we record, parliament in Cyprus has rejected the bailout deal roundly. No matter where this goes though, what happens in this tiny little place could have global implications.
SMITH: Hello. And welcome to PLANET MONEY. I'm Robert Smith.
CHACE: I'm Zoe Chace.
Another day, another European bailout.
SMITH: (Laughter) and, you know, every time we do this, the country seems to get smaller and more obscure.
CHACE: And you have to believe even more that a tiny little place can have a very big impact. And that is true for Cyprus. Cyprus is doing something very, very unusual. It is breaking a taboo actually in the financial world. It is going after peoples' savings accounts. And this decision, it reveals something that we don't really like to think about.
SMITH: We can't think about it if you want to keep your financial sanity.
CHACE: Banking is a crazy, risky business. And your money is not actually always safe in there.
SMITH: Even when your government says it is.
(SOUNDBITE OF SONG, "HEAVY FEET")
LOCAL NATIVES: (Singing) After everything - after everything...
SMITH: Every European crisis may feel the same. But each bankrupt country has its own sad story.
CHACE: Little Cyprus got there by deciding it was going to be the banking center of the Mediterranean.
SMITH: And this isn't always the worst choice for an island because if you're an island, you don't have much industry. Maybe you don't have a lot of natural resources. It's hard to ship things back and forth from the country. So if you're an island, you can trade in money.
CHACE: Cyprus sold itself as a sort of European version of the Cayman Islands. We talked to Jacob Funk Kirkegaard about this. He's an economist with the Peterson Institute.
JACOB FUNK KIRKEGAARD: They advertise the right places. You know, I think if you look at the ad pages at the back of each week's Economist magazine, I bet you you will always find that there is ad for offshore financial services from various centers around the world. And they tend to be small sovereign islands because they have kind of a niche, if you like, in this line of business.
SMITH: Now lots of islands want to be a banking center. So Cyprus had to compete. They offered low corporate taxes, high interest. And with a wink and a nod, they implied that they wouldn't ask too many questions about where that money was coming from.
CHACE: And this promise worked especially well with one country in particular, Russia. They had a bunch of new wealth after the breakup of the Soviet Union, some of it from questionable origins and some of it totally legit. The Russians were used to vacationing in Cyprus. They have a lot of cultural ties there. It's kind of a win-win for everybody.
SMITH: So over decades, money had been pouring in from Russia, more money than Cyprus could have ever imagined, more money in fact than the entire Cypriot economy was worth.
CHACE: And it worked fairly well for everyone involved until recently. Russian companies could incorporate in Cyprus, avoid a lot of taxes. And they got this added benefit, which is pretty extreme. Banks in Cyprus would pay close to 5 percent in interest, 5 percent even while banks in the U.S. and Germany were paying more like 1 percent.
SMITH: And here is where the banks got in trouble. Banks make money by taking that cash that you put in your deposit account and lending it out at an even higher interest rate. When Cypriot banks were taking in deposits at 5 percent interest, they had to find someone willing to borrow that money at an even higher rate of return - six, seven, 8 percent interest. They needed to find a high-risk borrower who was willing to pay through the nose.
CHACE: Luckily for Cyprus, that chump was close by.
FUNK KIRKEGAARD: They took a huge bet on Greek government bonds. They bought a lot of Greek government bonds because they thought presumably, well, that - they're going to be safe. They're going to be bailed out. Of course that was a huge mistake. This was what has sunk the Cypriot banks and now the Cypriot economy as a whole.
SMITH: Oh, Europe.
CHACE: Oh, Greece.
SMITH: This is such a familiar story at this point.
CHACE: Tiny island. Think Ireland, Iceland. Raise a bunch of money by investing in something risky. Make promises to depositors that they'll be there when you need them. Then the whole thing explodes.
SMITH: People in Europe are sick of this story.
CHACE: We are kind of sick of this story.
SMITH: And we know what happens next. The tiny country goes to the rest of Europe and says, hey (laughter) you know, funny thing. We need a huge loan, billions of dollars to keep our banks open and to stop our entire country and perhaps the euro from collapsing - please.
CHACE: Unfortunately for Cyprus, there's a lot of bailout fatigue in Europe right now. And no one wanted to send a bunch of money to help out the bank accounts of Russian oligarchs. So this past weekend, finance ministers from the EU drove a tough bargain.
SMITH: The condition was Cyprus - Cyprus, you have to have some skin in the game. You have to come up with some money yourself, 5.8 billion euros to be exact. And Cyprus looks around. And they're a tiny country. They don't have many businesses, industry, people to get that kind of money from in taxes.
CHACE: And - so the Cyprus government comes up with this crazy idea.
FUNK KIRKEGAARD: I like to refer to it as this sort of - the Willie Sutton rule. You go where the money is. And in Cyprus they needed to come up with about 40 percent of GDP, which if you scale that to U.S. terms, that meant that the federal government would have to find, you know, somewhere between about six - six-and-a-half trillion dollars somewhere in America.
CHACE: There is one place only in Cyprus where you can find a bunch of money these days. And that is in the savings accounts of these banks. Take a little bit from small accounts. Take more from the larger accounts. Basically, make anyone who is a saver bail out their own banks.
SMITH: On the one hand, you can see the attraction of this idea. You go to where the money is. You take a one-time hit against these bank accounts. And you avoid having to do some really horrible, brutal, austerity measures in your country - increasing taxes to an unsustainable amount, maybe driving the country even further into recession. But on the other hand, this idea (laughter), going after the one thing people in Cyprus thought was sacrosanct, that was safe, this can cause a panic.
CHACE: The most galling part though really is that these Cyprus savers, the depositors in Cyprus, they were insured. Most bank depositors are. The Cypriot government looked its people in the face and said we have a deal with you. If something happens to this bank, if this bank has to be taken over by the government, the government will make you whole, at least for accounts that are less than 100,000 euros.
SMITH: But now the government is saying not only will we not honor that promise, we will actually take money away from you. It is like your car insurance company, like Allstate running up (laughter) to your Subaru, smashing the window and stealing your stereo.
CHACE: Now, the details of the Cypriote plan are in flux as we're recording. There was understandably a lot of concern about grabbing money from the savings accounts of little old ladies in Cyprus. The Cypriot parliament has just now rejected the current idea. There is a good chance the deal will be modified in some way to reduce or eliminate the hits to smaller deposits.
SMITH: But whatever happens now in Cyprus, the damage may have already been done. Remember Michael from the beginning of the show standing in line at the ATM? - he says a lot of his friends are talking.
M. COREY: People that have said that they can take money out of the country, they will. When we went into the European Union people started feeling safer and started bringing all that cash that they had sent abroad and putting it in Cypriot banks. And now a lot of them, which brought maybe hundreds of thousands of euros back are saying, you know, we did the wrong thing. We have to take it out again. And a lot of people will take it out.
CHACE: And this is the great danger. This is the kind of thing that economists worry about. We talked to this woman, Megan Greene. She covers the euro crisis. She's the chief economist with Maverick Intelligence.
MEGAN GREENE: I think Cyprus sets a huge precedent for other countries. And - so while we might not see immediate panic right now, the second a eurozone country gets into trouble people with their money in the banks will know that part of the toolkit now for bailing out countries is to, you know, force a loss on depositors.
And - so I do think that the second a country gets into trouble people will look to take their money out of the banks. And of course that is the absolute worst time for people to pull their money out of the banks is when the country's already in trouble. The fact that they're forcing losses on someone is a good idea. You know, that's going to have to happen at some point, I believe.
But foreseeing insured depositors in Cyprus to pay for it I think is a catastrophic move that could cause bank runs elsewhere in Europe and completely undermines any of the progress that they've made in trying to draw a line under this crisis so far. I do think when we see the bigger countries, Spain and Italy start to get into trouble, what they've decided to do in Cyprus will come back to bite them.
SMITH: And, you know, it wouldn't be a story about a European debt crisis if it didn't end in exactly the same place every time.
CHACE: Spain and Italy.
SMITH: Whatever is going wrong is fine as long as it doesn't hit Spain and Italy. And, you know, Jacob Funk Kirkegaard from Peterson Institute who led us through sort of the history of Cyprus and the details of the bailout, he said, look, we've gotten the point in the European crisis where people can tell the difference between one crisis and another.
And Cyprus is a unique case. No one else tried to be the same kind of banking center it was. No one else brought in the kind of Russian depositors that Cyprus did. And - so Jacob Funk Kirkegaard says this thing happening in Cyprus is a one-off. It will happen. And it will not haunt Europe.
(SOUNDBITE OF SONG, "HEAVY FEET")
LOCAL NATIVES: (Singing) After everything - after everything...
CHACE: As always, let us know what you thought of the show today. Email us, PLANETMONEY@npr.org. Or you can find us on the blog, npr.org/money.
SMITH: And those of us on the European crisis response team, we will stay ever vigilant for ever smaller countries. Vatican City, I'm looking at you next.
CHACE: (Laughter) yes. I will be there.
SMITH: I'm Robert Smith.
CHACE: I'm Zoe Chace. Thanks for listening.
(SOUNDBITE OF SONG, "HEAVY FEET")
LOCAL NATIVES: (Singing) After everything - after everything, left in the sun, shivering. After everything. Transcript provided by NPR, Copyright NPR.