by Business Editor David Murphy

Cypriot shock risks undoing all the progress made to date to calm nerves about euro zone crisis

On the surface, the Cyprus bailout may have seemed relatively straightforward. The island originally requested aid in 2011, and it was intended to be a small rescue.

Yet the Cypriot aftershock now risks undoing all the progress made to date to calm nerves about the entire euro zone crisis. While it may not damage Ireland, it could make the process of fixing the Irish banking system more difficult.

Bailing out Cyprus was different to rescuing other countries. The Troika could not lend the country all the money it needed and recoup those funds by hiking taxes (as is happening in Ireland) because the debt would be too high in proportion to the size of the economy. Yes, even higher than in Ireland. Nor were there enough bank bondholders to burn to raise the necessary cash.

That left the Troika and the Cypriot government with the prospect of hitting savers. But some spectacular errors have been made. While many of the large depositors are Russians, who have traditionally used the island’s financial system, residents of Cyprus will be hurt too.

Despite a deposit guarantee of €100,000, the Cypriot government rowed back on that undertaking, deciding that ordinary people should lose some of their savings. This has undermined the credibility of assurances given by other countries to depositors.

Until now, savings had remained untouched in the euro zone crisis. With Cyprus, the Troika has crossed that line. Its new policy is that it is acceptable to burn depositors, even small ones.

It means countries, such as Spain, may encounter scepticism in seeking to convince depositors that their money is safe if banks need further capital.

As Ireland learned from its banking crisis, large depositors can easily move money from one jurisdiction to another.

Last year, CRH’s senior cash and debt manager Phil Shepherd told the Irish Association of Corporate Treasurers’ annual conference that his company did not leave cash in a euro zone bank over weekends. Instead, it uses banks in the UK, US and Asia.

At the same conference, Department of Finance chief John Moran said that while retail deposits had returned to the Irish banks, corporate deposits had not.

“We hear a lot about the banks and whether they are lending to companies across the country. I think it is an equally fair question to ask whether the companies, that are sitting on cash, are lending to the banks?” he said.

Irish banks have been making efforts to win back large depositors, but they still owe €88 billion to the ECB, down from €101 billion in August. As confidence has begun to return, the Irish Government is scrapping the bank guarantee this month.

But after Cyprus, regaining the trust of large depositors suddenly becomes a great deal harder.