The Changing Face of the Cypriot Financial Crisis

Recently the republic of Cypress has been embroiled in a financial crisis that seems to weaken their capacity to function as a monetary entity. Since the information has been released about Cypress’ dire situation, the forecast for a quick economic recovery seems to further out of reach then previously understood. Initially Cypress was slated as being the fifth in a long line of European nations that sought to mitigate their over exposure to the Greek financial crisis.  In March 2012, Finance Minister Kikis Kazamias and Central Bank Governor Athanasios Orphanides, assured the public that the plight facing the Cypriot economy was “sustainable”. But the accurate information about the true nature of the Cypress economy was yet to be learned.  The actual statistics pertaining to the health of the Cypress economy were initially withheld in order to make the notion of an ECB bailout more attractive.  But the ECB and IMF could not be fooled so easily, they demanded a higher level of transparency then was previously delivered by other financially way word countries.  Instead of needing a 5.8 billion Euro loan to bridge an existing financial gap.  One novel solution that was touted was to tax the deposits of uninsured deposits (deposits over 100,00 Euros) at a rate of 15.5%, while leaving the insured deposits untouched. The public actively protested that their deposits would be used to bridge the solvency gap with Cypress.  But with such a dire situation facing Cypress, what monetary actions will be taken to avoid further economic degradation?  Can the Cypriot economy survive a rating fall past that of junk status.

In order to raise the 23bn Euros needed to withstand such an economic crisis, Cypress had to augment their methods of practicing business.  For instance, rather than the 5.8bn Euros previously asserted, it is nearing 10.6bn Euros. The question where is this money going to come from? The taxation of uninsured deposits will bear the brunt of the Cypriot Bailout, being taxed at 15.5% would likely lead to a potential run on the banks. Additionally Cypress relaxed controls on accounts and capped the restrictions upon transactions that fall below 300,000 Euros, as well as enforcing the limit for withdrawal from cash accounts at 300 Euros daily.   Furthermore, Cypress may have to sell their reserves of nearly 300m Euros of species gold, in order to further prove their viability to the European Commission.  These actions taken, in addition to the winding down the operations of the Laiki Bank (Cypress’ second largest bank), whom was burdened by the toxic loans to the nation of Greece. Will these monetary actions be enough to stabilize the Cypriot economy?

To maintain their economic viability the Cypriot government must capitulate to the assertions of the ECB and IMF. The lack of solvency within the nation has brought the scrutiny of independent monetary bodies, which will decide the course of Cypress’ economic future. A finalized bailout package is slated to reach at a meeting on Friday April 12th 2013. The meeting will discuss the viability of Cypress’ economic future as well as their continued existence within the Eurozone. Questions to be asked are; Should Cypress give up monetary autonomy in order to financially survive, and Can the European Union prosper with members that are confronted with continual insolvency crisis’?. Can a nation that is projected to have economic contraction of 8.7% this year, still be viable member of the EU and the world economy? The near future will answer should questions.