Cyprus is changing from a disaster to a catastrophe before our very eyes. The primary purpose of any of these EU bailouts is to maintain stability until after German elections on September 22, 2013 without any regard for the what will happen in the crisis country.
The troika is granting Cyprus a €10bn loan. Initially, Cyprus needed to procure another €7.5bn on its own to fund the necessary bank recapitalization among other necessities. The deposit flight of insiders in the days leading up to the collapse caused a larger capital crunch than anticipated pushing the final sum needed to €23bn. Rather than adjusting the program, the troika has ordered the Cypriots to come up with another €5.5bn on their own. This figure is about one-third of Cyprus’ GDP and twice its annual budget. Cyprus will not be able to raise this money on its own now that the banking sector, the largest contributor to its GDP, has been destroyed.
Even if the €23bn bailout was doable in the short-term, Cyprus would slowly suffocate to death under a crippling pile of debt for the next decade or two. Before the bailout, Cypriot government debt had risen to €15bn. Add the €10bn loan, and it rises to €25bn, which is close to 140% of GDP. If the troika increases its loan to €15.5bn to cover the shortfall, the ratio rises to 170%, which are Greek levels. In case you hadn’t noticed, Greece isn’t doing to well right now.
Amidst this financial distress, the finance minister and three central bankers have resigned in the last two weeks. Parliament ceased an investigation of money fleeing the country, possibly due to the fact that its members used inside information to get their own money out of the country while their constituents were left to bear the brunt of the bank failures.
The current bailout will not keep the lid on the Cyprus crisis until German elections are finished in September, so there has to be a Plan B from the troika. Cyprus should insist on debt forgiveness as part of a new bailout so that it does not turn into Greece. If it does not receive this concession, it should exit the eurozone. A year of severe economic distress beats a decade of misery.
Of course, this is unlikely to happen. The recently elected President is deep within Merkel’s pocket and is committed to seeing her reelection go smoothly rather than doing what is right for his people.