The sovereign debt crisis in Cyprus marks the fifth European nation to need a bailout in recent memory, but this crisis is unique because European Union regulators are taking the unprecedented step of taxing bank deposits to finance part of the bailout for the nation's banks. Lee Buchheit, sovereign debt guru and architect of Greece's bailouts, tells Bloomberg Law's Lee Pacchia that despite the drastic measures taken, the endgame for Cyprus might be another round of restructuring. "I'm not sure this is over," says the Cleary Gottlieb veteran.
While regulators agreed to tax only uninsured deposits, Buchheit feels they were 'tone-deaf' and mistaken to initially suggest seizing insured bank deposits as well. 'It made the Greek bailout look disciplined and far-sighted,' he says.
In addition, the current plan to use uninsured deposits to recapitalize Cypriot banks marks a major shift in the EU regulatory scheme. "They have certainly changed the rules of the game" for future Eurozone bailouts, he says. Whereas the European Central Bank strongly counseled against impacting senior creditors of banks in previous bailouts, regulators have are now shifting the burdens of bank recapitalization from taxpayers to investors and depositors.
Despite these efforts, however, Buchheit senses that the parameters of how much money will be needed to recapitalize the banks have changed. "The situation is spiraling down...they'll need more money because the economy is worse, tax collections less, deposits will flow out when they can flow out," he says.
As for which European nation will be next in need of assistance with its sovereiegn debt burdens? Buchheit feels that while many are looking to Slovenia, he sees real economic and political problems in both Italy and Spain.