"The
Cyprus situation had been simmering for at least a year when in March of 2013
it finally broke; Cyprus had a week to take care of its banking situation or
else face a cutoff of access to the eurosystem by the ECB. This brought matters
to a head; the Cyprus Bail-In was finally settled upon, where uninsured
depositors in the two largest banks in Cyprus took major haircuts, and must
wait for return of their money until the assets of the banks are run down.
The banking problems in Cyprus had their roots in the Greek Sovereign Default, and were known by the general public for about a year prior to the recent default; a New York Times article dated April 11, 2012 lays out the particulars. (...)
Let's imagine you ran a German bank, and you paid very low rates to your overnight depositors. You have a great deal of really cheap money on your hands. What are your options to make money? You can either loan money to German homeowners one by one, but there are only so many German homeowners, and they only want to borrow so much money. So after loaning all you can loan, you search the world to try and find another bank that is advertising high rates for deposit money, and you stumble on the banks in Cyprus. (...)
Looking at the timeline, even as late as the end of 2011, when it was clear Greece would default and the banking regulator had to know the banks in Cyprus were doomed, the amount of Eurozone-bank derived deposits in Cyprus was over 20 billion euros, a good portion of which would be subject to massive losses if the Cyprus Template were to be applied at that moment. (...)"
