Today I have officially recognized the fact the I am old
**sob** **sob** (for those who are startled by this rather surprising statement
especially from me, it is because today is holi and I spent it working in the
office). Now that I am old **sigh** I think I should start off writing about
some grown up thing! Well so here I am with an analysis of the recent Cyprus
economic crisis.
Introduction
Cyprus is one of the 17 countries in the European Union
which use the same currency (euro). Many countries of the EU have recently been
struggling with economic crisis of varied magnitude like Greece, Ireland,
Spain, Italy, Germany and many more. Greece is one country which has hogged the
limelight the most ( and yes, for all the wrong reasons). If this article goes well,
I will do another one on Greece! So coming back to Cyprus. It is a very small
country both size wise and population wise. But its banking industry is huge,
mostly attributable to the fact of it being popular as an offshore tax haven.
Tax haven is basically a place where taxes are low and there are almost no
checks on the source of the money. So people with a lot of money from not so
legal sources choose to park their money in such countries. The impact of
Cyprus being a tax haven can be easily gauged by the size of its banking
industry. The size of the Cypriot banking industry is almost 5 times the size
of its economy according to Standard & Poor. It is estimated that almost
one third of the money in these banks belongs to Russian oligarchs.
Precursor
Okay all this is good but you must be wondering where does
economic crisis come into this. Well, 2007-08 was the time when US was hit by
the subprime mortgage crisis (again an article can be written on this). Because
of the size of the US economy, it had a domino like negative effect on many
other economies. In 2009 the Cypriot economy shrank by 1.67% mostly due to a sharp fall in its tourism and
shipping sector. This led to unemployment, now the state expenditure increased due
to the increasing unemployment benefit costs. Another significant event that
happened in 2011 was the EU decision for a haircut on the Greek bonds, Cyprus
had invested heavily into these bonds. As the banking industry is huge, it was
well understood that if these banks crashed, Cyprus economy would go to the
grounds also. International rating agencies also downgraded the credit rating
of Cyprus. It was at this time that Cyprus requested for a bailout from the EU.
The Crisis and Bailout
Negotiations then
started between Cyprus government and the troika of European Commission,
International Monetary Fund and the European Central Bank. On 16th
March 2013 it was decided that 10 billion euro bailout package would be given
to Cyprus on one condition. The condition was to close the 2nd
largest bank of Cyprus , the Cyprus Popular Bank (Laiki Bank). The biggest
losers will be the bondholders and depositors who have more than 100,000 euros
in their accounts. It is estimated that they might loose upto 20% of their
deposits and even more in some cases. Depositors having less than 100,000 euros
in their accounts will not be affected.
Impact
Now because Russians have a lot of money here, they will
ofcourse be angry. An interesting thing happened here also. It was reported
that Russian President Vladmir Putin and Prime Minister Dmitri Medvedev
had initially criticized the EU bailout
has being tantamount to theft. They were against the bank deposit levy and Medvedev
went as far as to channel Vladmir Lenin by saying “The stealing of the stolen
is continuing there, I think.” But recent reports are saying that Putin has had
a change of heart and is now supporting the bailout. So this was in very short
(and I am sure with some factual errors also) a description of the recent
Cyprus economic crisis.
Lingering Questions
Now what ? This crisis has some raised some questions over
the tax havens. Come to think of it, the Russians had deposited their money in
Cyprus Banks to save taxes and now they are suffering losses. After this people
across the world who take advantage of the lax rules and laws in the tax haven
will think twice about shifting their money from their own country to these tax
havens. Would Cyprus have agreed to this deal had the money in these banks
belonged to its own people? This will seriously impact the unrestricted
movement of capital which has become the norm now. Lets see how things change in the coming days.
PS: If you find any factual error, please comment. I have tried to be as correct as possible but because I am a human (sad, being alien would have been nice :P ) mistakes do happen!
PPS: First grown up post! YaY!!
PPPS: Is it nice ? ;)
