Cyprus: From Frying Pan to Fire
The country faces a recession so deep that it may soon need even more money to survive inside the euro
“Cyprus’s Bank Crisis Feeds Recession Risk“
– Alkman Granitsas, Wall Street Journal, 3/24/2013
Cyprus economics is based on two things – finance and tourism.
Both go down the tubes in this latest EU self-inflicted, double-barreled shotgun wound.
Conditional for a €10 billion loan to bail out its banking sector, the EU and IMF told Cyprus it had to cut its financial sector in half. That is half its economy.
Cyprus’s 2nd largest bank, Laiki Bank, was already in government receivership and will be closed. It’s existing €9 billion in EU debt is to be transferred to Cyprus’s other already teetering main bank, the Bank of Cyprus.
Creditors also imposed a one-time depositor tax on high-end accounts to raise €5.8 billion. ($7.5 billion U.S.) How would you like to go into your bank tomorrow and find your account balance is 40% less than it was on Friday? Its happening in Cyprus.
To prevent bank runs, the government is imposing a daily maximum of about €100 that citizens can withdraw. You can bet your Bibby a lot of folks will be making daily trips and stop their automatic payroll deposits.
Without a stable financial system, tourists will be scared off. Nobody wants to get stuck without cash in an unstable foreign land, even one as pleasant as Cyprus. As the financial gurus would tell you, that puts more “downward pressure” on their economy.
It doesn’t take a rocket scientist to see that Cyprus’s days as a financial haven has just ended with a big fat thud. Foreign deposits and investment will dry up faster than fresh desert paint.
The Domino Effect
Why did the EU and IMF force steps whose only logical outcome is to further damage Cyprus’s tattered economy?
Back in the Cold War there was a belief that the contagion of communism had to be stopped. It was believed that if one country, like South Korea or South Vietnam, were allowed to fall to the Communists that it would trigger a domino effect turning the entire world communist.
There is a similar belief about the European Union. It is believed that if any country defaults its debts that it will trigger a European contagion that will doom the euro and even the European Union itself.
Just like the Cold War, nobody knows if the EU domino effect is real.
An unproven domino theory drives every decision the European Union makes.
Cyprus is the 5th country bailed out. Like the others, its bailout is specifically crafted to save the euro. Each bailout becomes more imposing and irrational than the one before it.
Now depositors are forced to pay to save the euro. Financial reports suggest that Cyprus will be worse off long-term than it is now.
The EU foolishly ignores that the eurozone lacks a fiscal union, so it can’t possibly work.
Can a fiscal union save the eurozone? Where will it end? Nobody knows.