From bail-out to bail-in: Explaining the variegated responses to the international financial aid requests of Ireland and Cyprus

The financial crisis that hit the Eurozone in 2010 drove a number of its members near the brink of collapse and left them with no option but to request assistance from their EU partners. In response to these requests, the reaction at the European level came in coordination with the IMF, through the creation of tripartite formation (the Troika, involving the IMF, the ECB and the European Commission), but not necessarily in a uniform manner. Variegated rescue packages were offered and different policy tools utilised, even for cases that were seemingly similar. This paper juxtaposes the cases of Ireland and Cyprus, two peripheral island economies with disproportionately large banking sectors and attempts to explain why in the latter case a ‘bail-in’ clause was included for the first time as part of a rescue package. In doing so, the paper firstly outlines the similarities in the capitalist model prevalent in the two countries, involving the precarious growth of their financial sectors that ultimately fuelled their respective crises. It then reviews the ad-hoc institutional arrangements that creditors put together in order to deal with the specificities of the crisis in both countries. Despite strong similarities in the root causes of their financial implosion, the ‘remedies’ devised for Ireland and Cyprus varied, with the most striking contrast being the unprecedented use of a ‘haircut’ for bank deposits in Cyprus (‘bail in’ clause). In explaining this contrast, the paper places emphasis on: i) the timing of the Irish and Cypriot bailout deals and the lessons drawn from previous rescue packages (ii) the intergovernmental bias and power asymmetry enshrined in the two rescue operations, (iii) rivalries over policy prescriptions within the Troika and (iv) the need of the creditors to signal a potential change of direction for subsequent rescue operations.