Cyprus is now the most talked-about economy in the world -- an odd position to be in for a country that few could find on a map until this week.
Cyprus' $13 billion bailout, combined with roughly $6 billion of uninsured deposits whose future is in high doubt, seems minuscule compared with other international crises. And it is. But when put into context of how tiny a country Cyprus is, the numbers become staggering.
Cyprus has an annual GDP of $24.7 billion, according to the World Bank. Its combined bailout and deposit losses, therefore, total something around 75% of GDP.
If the United States required a bailout of equal proportion, the bill would total $12 trillion, or 18 times the size of the 2008 TARP bank bailout. Cyprus' deposit losses alone total up to the American equivalent of $4 trillion, or roughly equal to all the deposits held by Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup combined.
Cyprus Popular Bank reported a loss of $5 billion in the year ended September 2012, according to S&P Capital IQ. The equivalent of 20% of GDP, a similar loss in the United States would total $3.2 trillion, or nearly one-quarter of the entire market capitalization of the S&P 500 (SNPINDEX:^GSPC). And that was just one year's loss at one bank. In the last two years, Cyprus Popular Bank lost $8.6 billion, or more than a third of Cypriot GDP. The American equivalent would be like losing the annual output of California, Texas, New York, and Florida combined.
These comparisons are useful only because they lead squarely to one point: The Cypriot banking sector was grotesquely large in relation to its economy. This is largely because the tiny island country became a haven for foreign cash, drawing in assets at a rate many times disproportionate to the wealth of its citizens. Peter Gumbel of TIME writes:
Over the past 30 years, since the fall of the Berlin Wall, the island has banked on its ability to attract money from Russia and elsewhere as an offshore center. Oversight has been tightened up since Cyprus joined the E.U. in 2004, but it remains relatively lax by international standards, and foreign companies pay a flat tax rate of just 10%. For a while the strategy seemed to work well; Cyprus built up a gargantuan banking industry, which is currently about five times the size of its total economy, according to Standard & Poor's.
The flood of foreign cash further relied on the belief that Cyprus' EU neighbors and the continent's central bank would could to the rescue should its banking sector stumble. To an extent, they did. But not before large depositors were forced to take large haircuts on their cash. Now, senior finance members of the EU are signaling that similar deals can be used as a template for future bailouts.
The idea of a banking haven is done, in other words. After the dust settles, it is unavoidable that Cyprus will have to adjust its economy dramatically. Its banking sector, the engine of so much of its economy, will be left a fraction of its previous size. There is only one way to compare the likely final outcome in the context of America: The Great Depression, only worse.
Morgan Housel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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