The paper is an overview of the sovereign debt crisis in Cyprus. It also discusses the reason and options available for the Cyprus government to deal with the debt crisis.
Government debt and reckless banking systems are some the major causes for financial crisis. Recent on the list is – Cyprus, the sovereign debt crises which involves the exposure of Cypriots bank to the Greek Debt Crisis. A small country is being brought to its knees by a huge banking system which has recklessly been lent money from overseas. The tiny island nation has managed to put the entire Eurozone on red alert. Looking at the bigger picture the problem is a lot to do with who banks in Cyprus and why. Cyprus is one of the countries in the world which is classified as being a tax haven. Iceland in 2008 and now the Cyprus fiasco, both the small island nations let themselves become home to casino banks transacting many times the size of their actual economies. Much of that money transacted is from wealthy Russians. The Russians depositors have been using the sector for tax evasion and secret operations. Well the crisis can be blamed on a number of other factors which played a role – real estate bubble, euro membership and financial ties with neighboring defaulting countries. Banks were allowed to borrow from overseas indiscriminately, lending it on again in even greater quantities. But when these loans could not be paid, the banks went bust, threatening the savings of all those with accounts in the banks.
The original plan few months ago was madness; controls on money leaving the country have had to be introduced. Targeting the deposits of domestic savers however small their savings were. The plan protects the depositors who had less than euros 100,000 was safe as per the EU intervention. Depositors over euros 100,000 will see their claims taken into a bad-bank, from which they could get back very little. Lenders to the banks (mostly bonds) will also be hit which was not case in the original plan, and is the right approach because there is no reason why only tax payers of Cyprus should bailout the reckless bankers backed by the lender such as rich Russians, hiding their money away in a secretive tax haven. It many ways it repeats the bitter Icelandic experience, well the question needs to be asked haven’t we learnt anything from the past crises. However, by targeting the Cypriots or the external forces, it could have major implications for the future business activities in the country. And it is thought-provoking this approach is been accepted by EU, well it is rich Russians who are set to lose out, not German, French and British Banks.
Prior research paper regarding financial crises is fairly extensive, as is the literature examining the causes, crisis management and remedies.
One of Research paper suggests that causes are two thoughts. A first thought puts the blame on economic fundamentals and bad policies of the borrowing countries. The second thought points out that financial panic, resulting in sudden shifts in market expectations and confidence. So whose fault was it? The countries who borrowed too much? Or the lenders, who knowingly lent too much? Are the international organization and/or credit rating agencies who failed to blow the whistle also to blame? (Rosa Maria Lastra (1999). The speed with these seemingly healthy banks failed calls into question of efficiency of the current measures of bank performance and financial health. The financial statements that these banks file with their regulators gave little indication of their deteriorating assets (Thomas J. Linsmeier 2011). Crises have become more contagious over the past four decades out of carelessness and wishful thinking with regard to the power of finance. Rather than being natural outgrowths of unfolding capitalist regimes, modern finances has been used as a means for the few to get rich quick, with disregard to the real economy(Sara Hsu 2012). (Singala and Kumar 2012) indicate that euro zone nations faced their own element of fiscal problems due to banking sector distress, property bubbles, and budget deficits caused by excessive spending.
Cyprus Debt rises
At Euro 15,320 million, Cyprus’s public debt in 2012 shows the second-largest annual increase in Euro zone debt, after that of Spain. It rose from 71.1% of the GDP in 2011 to an alarming 85.8% of the GDP in 2012. – Economic Times