From Bail-Out to Bail-In: Explaining the Variegated Responses to the International Financial Aid Requests of Ireland and Cyprus

As the financial crisis unfolded in Eurozone, a number of Euro states requested financial assistance in order to avoid financial collapse. In the absence of an EU financial crisis mechanism, Eurozone states, in collaboration with the IMF and other EU institutions (in the context of the Troika) responded to these requests in an ad-hoc manner. Ireland and Cyprus were both prominent recipients of EU bailout packages, having arrived to the point of crisis though broadly similar trajectories; namely through excessive financialisation and an explosion of private debt. Yet, the bailout prescription for both countries was very different. Whereas in Ireland all deposits were guaranteed, in Cyprus the rescue package included a ‘bail in’, that is to say depositors lost part of their deposits in order to recapitalise the island’s systemic banks. The application of such divergent policy responses has left unanswered questions as to the reasoning and motives of EU decision-makers. This paper examines both cases in comparative perspective, employing a theoretical framework that utilises insights from intergovernmentalism/interinstitutionalism on the role of the states and institutions in protecting their interests while shaping/negotiating the rescue packages; the importance of reputational investment for the actors involved; the issue of timing and the sequencing of events; and the processes of policy-learning and lesson-drawing as the crisis developed and experience was gained in the handling of financial aid requests.