Cyprus, the tiny Mediterranean island nation of 800,000 people (20 times less than the population of Delhi), managed to evade bankruptcy and exclusion from the Euro Zone by successfully negotiating a deal with The Troika - the three largest lenders and debtors in Europe - The European Central Bank (ECB), The European Commission (EC), and The International Monetary Fund (IMF).
However, rejoice not yet, for this $13 billion bailout comes at a massive price. Never mind that Cyprus' debt is now going to be 100% of its GDP, but in order to avail of this $13 billion loan, the Cypriot government has to raise about $5 billion on their own (AP). But how is a nation, whose GDP is about $20 billion, supposed to raise 25% of their GDP in six months? Simple, they are going to take away bank deposits over $100,000 from Cyprus' second largest bank - Laiki. Like the US, bank deposits in tax-haven Cyprus are insured by the government for up to $100,000, anything above that is non-insured deposits, which the Cyprus Government plans to use as part of their $5 billion "fund raiser". The legality of such an action is still under discussion, but if it is sanctioned, people may lose up to 40% of their deposits at Laiki. Most of this money actually belong to foreign depositors, mainly Russians, who use Cyprus as a tax haven.
Laiki is going to be split into a "good" bank and a "bad" bank. The good bank with its insured deposits will merge with Bank of Cyprus, the largest bank in Cyprus, and the "bad bank" with all its toxic and uninsured assets will be dissolved! Not to mention all deposits in Bank of Cyprus over $100,000 is going to be frozen indefinitely and there is a withdrawal limit of $100 per day to stop a "run on the banks". A very bold move indeed.
Austerity measures have already bludgeoned the economy with everyone from contract teachers to businesses taking heavy hits, and now the dissolution of private bank funds is only going to make the public more enraged. Cyprus, once one of the most economically sound countries in the world with a net median income of about $30,000 per year (CIA), is now tottering on the brink of economic extinction. How did this happen?
Again, it all traces back to the US sub-prime mortgage disaster of 2007. Truly when the US sneezes, the whole world catches a cold. Cyprus, with its low tax rates is a haven for foreign, particularly Russian deposits. This created a bloated financial sector eight times its GDP! Like Iceland, the Cypriot financial sector had made a series of poor investments, including buying Greek bonds as a precursor to this crisis. Coupled with slowdown in the tourist and shipping sector due to the global economic meltdown, the Cypriot economy was unable to recover to its pre-2009 fundamentals. The massive size of the banking system also prevented the government to raise enough liquidity domestically to bail out its banking system.
For the past year (2012), Cyprus has relied on an emergency $2 billion dollar loan from Russia, Cyprus' closest partner; but a refusal on Russia's part to extend the loan resulted in Cyprus approaching the EU with their begging bowl.
Perhaps Cyprus has managed to evade bankruptcy and exclusion from the Euro zone with this bailout, but whether Cyprus' restructuring will be a Renascence moment is difficult to gauge. But, a good time to buy property in Cyprus I reckon.
For further reading.
Sources: Associated Press, Reuters, CIA Fact Book, BBC.
Laiki is going to be split into a "good" bank and a "bad" bank. The good bank with its insured deposits will merge with Bank of Cyprus, the largest bank in Cyprus, and the "bad bank" with all its toxic and uninsured assets will be dissolved! Not to mention all deposits in Bank of Cyprus over $100,000 is going to be frozen indefinitely and there is a withdrawal limit of $100 per day to stop a "run on the banks". A very bold move indeed.
Austerity measures have already bludgeoned the economy with everyone from contract teachers to businesses taking heavy hits, and now the dissolution of private bank funds is only going to make the public more enraged. Cyprus, once one of the most economically sound countries in the world with a net median income of about $30,000 per year (CIA), is now tottering on the brink of economic extinction. How did this happen?
Again, it all traces back to the US sub-prime mortgage disaster of 2007. Truly when the US sneezes, the whole world catches a cold. Cyprus, with its low tax rates is a haven for foreign, particularly Russian deposits. This created a bloated financial sector eight times its GDP! Like Iceland, the Cypriot financial sector had made a series of poor investments, including buying Greek bonds as a precursor to this crisis. Coupled with slowdown in the tourist and shipping sector due to the global economic meltdown, the Cypriot economy was unable to recover to its pre-2009 fundamentals. The massive size of the banking system also prevented the government to raise enough liquidity domestically to bail out its banking system.
For the past year (2012), Cyprus has relied on an emergency $2 billion dollar loan from Russia, Cyprus' closest partner; but a refusal on Russia's part to extend the loan resulted in Cyprus approaching the EU with their begging bowl.
Perhaps Cyprus has managed to evade bankruptcy and exclusion from the Euro zone with this bailout, but whether Cyprus' restructuring will be a Renascence moment is difficult to gauge. But, a good time to buy property in Cyprus I reckon.
For further reading.
Sources: Associated Press, Reuters, CIA Fact Book, BBC.
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