BRUSSELS — The plan to rescue the tiny European country of Cyprus, assembled in overnight talks in Brussels, was itself the product of European dysfunction and has left financial regulators, German politicians, panicked Cypriot leaders and a disgruntled Kremlin thrashing out a bailout package that left virtually all the parties outraged.
In the end, a bailout deal that was supposed to calm a financial crisis in an economically insignificant nation spread it wider, unnerving markets across Europe, raising fears of bank instability in Spain and Italy and sending pensioners into the streets of the island’s capital in protest.
As markets tumbled and the Cypriot Parliament fell into turmoil, salvos of blame hurled back and forth across the Continent as officials scrambled to explain what went wrong and how best to control the damage of what Philip Whyte at the Center for European Reform called a “completely irrational decision” to put bank depositors on the hook for part of the bailout.
The deal flopped so badly that finance ministers who came up with it early Saturday were on the phone Monday night talking about ways to revise it. Whatever the outcome, the dispute provides a vivid demonstration of why Europe, which until recently was congratulating itself on having weathered the worst of the financial storm, has such trouble making decisions with so many different interests represented at the table.
Politics get in way of economics and make it difficult for wealthy countries to line up behind a plan to help the smallest ones. The Northern European nations have grown so weary of bailouts for their southern neighbors that they were intent on exacting a hefty contribution from their latest supplicant. Germany in particular, with parliamentary elections looming in September, was set on driving a hard bargain.
A wild card in this instance were the Russians, who have deposited billions in Cypriot banks, extended a $3.25 billion line of credit to Cyprus in 2011 and were in negotiations to help Cyprus again. Cypriot leaders apparently were so concerned with keeping their wealthy Russian customers happy that they pushed their own citizens to pay more than some of the lenders were demanding.
The Russians reacted angrily to a so-called stability tax on deposits in Cyprus and at being left out of the negotiations. On Sunday, one Russian official was reported by the Interfax news agency as advising Russians to withdraw funds from Cyprus, saying the banking system is untrustworthy.
The all-night discussions began Friday and ran for 10 hours, ending shortly before dawn. Cyprus needed to come up with billions to help cover the costs of the bailout of the country’s financial sector or its European allies said they would leave it to face the prospect of collapse alone.