Cyprus' imminent collapse

One has to pity Cyprus. It is all but certain to experience an economic collapse over the next year or two at least on the scale of that recently experienced in Greece. Cyprus is being subjected by its European partners to the same recipe of severe fiscal austerity within a euro straitjacket that produced an economic depression in Greece. It cannot devalue its currency as a means to boost its tourist sector, and must also cope with the imminent collapse of its financial sector, which is overly dependent on catering to Russian depositors.

The origins of Cyprus’s dire economic and financial situation can be traced to a lack of adequate supervision of its financial sector. Fueled by an influx of money from Russians seeking a tax haven, the Cypriot banking system was allowed to grow to eight times the size of the Cypriot economy. Compounding the economy’s vulnerability, Cypriot banks managed to invest the equivalent of 160 percent of Cyprus’s GDP in Greek government bonds. When the Greek government defaulted on its bonds, the Cypriot banks experienced a capital shortfall estimated at close to €9 billion, the equivalent of approximately half of Cyprus’s GDP.

The decision by Cyprus’s European partners to force Cyprus to bail-in its large depositors as a condition for an International Monetary Fund–European Union rescue package is almost certain to have killed Cyprus’s attraction as an offshore tax haven, especially to Russians. After being subjected to a 40 percent write-down of their bank deposits and strict capital controls on withdrawing their remaining deposits, Russians surely will have lost all confidence in Cyprus as a financial center. This will make them want to move their money out of Cyprus at the earliest opportunity, which is almost certain to result in a dramatic scaling down of Cyprus’s banking sector and its employees.

Read the full version of this article on The American's website.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 27
    MON
  • 28
    TUE
  • 29
    WED
  • 30
    THU
  • 31
    FRI
Monday, October 27, 2014 | 10:00 a.m. – 11:30 a.m.
State income taxes and the Supreme Court: Maryland Comptroller v. Wynne

Please join AEI for a panel discussion exploring these and other questions about this crucial case.

Tuesday, October 28, 2014 | 9:30 a.m. – 12:15 p.m.
For richer, for poorer: How family structures economic success in America

Join Lerman, Wilcox, and a group of distinguished scholars and commentators for the release of Lerman and Wilcox’s report, which examines the relationships among and policy implications of marriage, family structure, and economic success in America.

Tuesday, October 28, 2014 | 5:30 p.m. – 7:00 p.m.
The 7 deadly virtues: 18 conservative writers on why the virtuous life is funny as hell

Please join AEI for a book forum moderated by Last and featuring five of these leading conservative voices. By the time the forum is over, attendees may be on their way to discovering an entirely different — and better — moral universe.

Thursday, October 30, 2014 | 2:00 p.m. – 3:00 p.m.
A nuclear deal with Iran? Weighing the possibilities

Join us, as experts discuss their predictions for whether the United States will strike a nuclear deal with Iran ahead of the November 24 deadline, and the repercussions of the possible outcomes.

Thursday, October 30, 2014 | 5:00 p.m. – 6:15 p.m.
The forgotten depression — 1921: The crash that cured itself

Please join Author James Grant and AEI senior economists for a discussion about Grant's book, "The Forgotten Depression: 1921: The Crash That Cured Itself" (Simon & Schuster, 2014).

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.