Cyprus Bailout Taking Shape

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Euro zone and Russia near debt compromise on Cyprus | Reuters.

The Eurozone’s crisis fighting efforts boil down to spending the minimum amount of money to keep members within the common currency, also known as kicking the can. In my last post on Cyprus, https://dareconomics.wordpress.com/2013/01/19/big-trouble-in-little-cyprus/, I wrote that a bailout would begin to materialize, but it would take months to put through.  The first step towards that bailout is within reach.

The Germans believe that Cyprus is a tax avoidance and money laundering haven and that saving Cyprus is saving the Russian oligarchs. They are probably right, but remember that every bailout so far has been about propping up the European banks who were neck deep in risky periphery debt. European oligarchs have much more sway in German politics than Russian ones.

Due to this facet of the political situation, it is necessary to get Russia to contribute to a Cypriot bailout before the Eurozone can proceed. The Russians have already done so with a five year €2.5bn loan extended in November of 2011, but never mind that. Germany wants more concessions, so Russia is offering to extend the duration of the loan another five years. This restructuring will reduce Cyprus’ immediate cash needs so that it is able to finance itself through ELA from the Bank of Cyprus while the Eurozone haggles over the terms of the bailout package.

Of course, this new bailout package will help Cyprus as much as the troika’s bailout package helped Greece. Cyprus’ GDP is about €18bn, and it currently has a 71% debt to GDP ratio. Adding a €17.5bn bailout package in the form of loans will give it a Grecian debt ratio of 171%. The banks will be saved as will their depositors, but the Cypriots will struggle under this debt for years. Cyprus should consider the Iceland model where banks are allowed to fail, but it will not.

This is a shame. Cyprus has been riven by ethnic tensions between its Greek and Turkish populations since independence with the Turkish military maintaining a quasi-state in the north part of the island. Lately, there has been talk of reconciliation and reunification, but I do not see the northern part of the island wishing to unify with the southern, Greek portion while it undergoes this economic duress.

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