photo: Reuters
Has Cyprus truly fixed its problems? Some say no. Loudly.
Some say that the measure adopted to save banks has ultimately achieved the exact opposite: it has destroyed them and the trust the banking sector could count on until now went with it.
In addition, the Cypriot government has submitted to a measure that has only short term effects, trading its default, which could have been limited to two banks, for a country wide depression.
Staying in the Euro zone while in the grip of the major depression everyone expects Cyprus to fall into will become a burden of near byblical proportion.
Some economist are wondering why Cyprus has not done what it should have at the onset of this crisis: abandon the Euro and, with it, all the constraints, and later shackles, that it requires.
The problem with Cyprus, a small island nation with an economy of just 23 billion annually, is that it has come to this juncture because its banks far exceeded in size that of the country's revenues. The banks had become swollen with off shore accounts seven time the size of the GDP of that nation. One has to wonder how the Cypriot government planned for this catastrophe. How do you save a bank that is in the hole for an amount many times the country's GDP? And what logic went into investing in Greek bonds by the same Cyprus banks?
When the ax fell, following the crisis in Greece, the banking powers played catch the ball, trying oh so very hard to deflect the burden of saving Cyprus banks. First there was the not so small slap on the wrist that saw a tax levy into the double digits, then of course the outright rebellion of its citizens and the consequent run on the banks, and ultimately the acquiescence to powers much greater than itself, which resulted in levies as high as 40% on those who 'qualified". To add to the general folly, the wind down of the failing banks will require draconian restrictions on individual banking, which will limit withdrawals, freeze deposits until maturity and a ban on exporting currency for travel or otherwise over the amount of 5000 Euro.
The net result of all this squabbling and banking fiasco is that Cyprus in the end, needs to eliminate the very same banks for which depositors had to sacrifice their money. One of the banks will be nationalized, the other will be wound down to nothing and silently closed. Recapitalization of both will be achieved by zeroing out some if not all depositors, shareholders and bondholders.
In this conundrum, still remains hanging the damoclean sword of the 13 billion dollar loan finally granted Cyprus by the EU central bank. The restrictions, the bailout burden and the lack of liquidity that will ensue, not to mention the collapse of the financial sector, will spell a future of near doom for the small country.
A small graphic details the projection for Cyprus' GDP in the next three years. And the picture tells the story.
Unemployment in Cyprus is already at nearly 15%, even before the depression that is expected will start manifesting itself economically.
Cyprus is in a position where its currency, although it is printed with a Euro symbol, is worth only 80% of the Euro of say German or Austria.
The best thing for Cyprus then, is to leave the Euro. It does not have much to gain at all from staying in it, at least not than can be foreseen in the future. The best thing to do, argues famous economist Paul Krugman, is to take devaluation as a logical course. It would ensure a quicker and less painful recovery. The other route, taxation and reduction of wages will not offer any relief for more than a decade, while the country struggles in a painful depression.
Source: The Atlantic / 3.28.13
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