Over the last month we have awaited to see what will happen with the Cyprus economy. Cyprus is in economic turmoil. They had to close the banks for several days while they discussed their options on what they needed to do to prevent a total collapse of the banking system. According to The Economist on March 16th a deal reached was that there would be a 9.9% tax on deposits above €100,000 or $130,000. Also, there would be a 6.75% tax on guaranteed deposits. The people voted this down on March 19th even after accounts below €20,000 were exempt. Cyprus banks would not reopen till March 26th.
Immediately after the tax deal was discarded Cyprus' finance minister was sent to Russia to ask for a bail out. Much of the money in Cyprus banks are Russian businesses who use Cyprus for their low taxes and wages. According to Bloomberg on April 8th Russia has agreed to restructure a €2.5 billion loan granted to Cyprus in 2011. With this restructuring Cyprus would have a 10% write-down of their loan. “We are making our own contribution” to help the island, Putin told reporters today at a joint briefing in Hanover with German Chancellor Angela Merkel. “At the request of the European Commission, we decided to restructure this debt”. Other Euro members' politicians have accused Russia of restructuring its loan because Russia uses Cyprus to launder illegal money. It is a strange move for Russia, because just last month they denied this request.
However, Cyprus would be in a very tight place if not for this restructuring and the €10 billion bailout deal with its euro zone partners and the International Monetary Fund. According to The New York Times If Cyprus was to default on its loans and leave the Euro Zone than Nicosia would have to bring back the Cypriot pound, which would plummet in value. Nobody knows how much, but economists guess it might be as much as 50 percent. Cyprus would also loose their best trade opportunities. Syria and Egypt are Cyprus' closest opportunities for trade, however both are not in good financial shape. Cyprus would have far more difficulty if they were to leave the Euro Zone. Thankfully Nicosia, Cypus' leader, has no intention of leaving the Euro Zone.
What never ceases to amaze me is the interdependence shared between countries who participate in the global economy. Much of Cyprus' economic trouble could be alleviated if:
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2)Russian lenders had originally chosen a banking system in a different country to flood with more than $30 billion
3)Russian banking officials had, less than a month ago, approved the restructuring of Cypriot debt
4)Cypriot banks had chosen to be more responsible and less reckless with their international investments
I think that you have great points on alleviating Cyprus' economic trouble. In addition, I think that not only the Cyprus banks, but all banks across the globe, should be required to increase their minimum capital requirements. The minimum capital requirement is the minimum amount of capital assets that a bank must hold, in relation to its debt. This means that a bank can not loan out more money if it does not have the necessary capital to do so. I believe this has been a key problem to many of the financial crises that have occurred around the world. Banks are lending out money that they necessarily don't have, so higher capital requirements would force the banks to hold more money, and in turn reducing the risk of defaulting on loans and going bankrupt. I believe this, along with the suggestions you proposed, could have greatly helped Cyprus before a bailout was needed.
DeleteIt will be interesting to see how the Cypriot parliament will react to these bail-out measures which is stirring uproar among Communists and Socialists in Cyprus. What is most troubling is the fact that bail-outs seem to be the remedy to resolve this issue (which may be reasonable), but could undermine austerity measures. Regardless, the issue of sovereignty comes into play in this scenario. For some politicians in Cyprus, they are not too fond of the idea of allowing Russia and Germany to determine economic recovery policies for Cyprus.
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