What's the Big Deal with Cyprus?

Trouble in paradise?

            To be perfectly honest with you, when I first saw Cyprus making headlines I thought to myself, “is this becoming news because the Wall Street Journal is tired of making front page stories about the Federal Reserve’s endless announcements to continue its quantitative easing program until 20xx?”  I’m telling you, this shows up on the front page of the WSJ at least once or twice every week and I think that Bernanke needs to realize that the world has caught on to his game.  I digress.  What is the big deal with Cyprus?  That’s the question that’s been in the back of my mind ever since the crisis popped up.  I’m sure that a big chunk of the issue is hype related to the fact that the Eurozone crisis isn’t really selling news anymore.  At the same time, a few things have happened differently with this crisis that make it noteworthy and not just another country experiencing hard times.  So the rest of this post is divided into three sections: an overview of the crisis itself, then a part on why this crisis is a big deal and one on why it is not a big deal. 

            The financial crisis in America had pretty far reaching consequences as we’ve seen.  For Cyprus, which is so dependent on tourism and shipping, those consequences hit quite close to home.  As a result of those tough times, it has been in a recession since 2009.  Government debt, in a manner similar to most of the rest of the world’s countries, has increased significantly since then.  Things got much worse recently when credit agencies downgraded its governmentally issued debt in 2011.  As we’ll see in the next section, most of Cyprus’ economy is involved in the tourism industries but there is a large banking industry for off-shore accounts, particularly Russian business magnates.  Allegedly 60 billion Euros worth of Russian assets are in Cyprus.  Cyprus banks are also very closely tied to the Greek economy as it had accrued 22 billion Euros of Greek private debt.  The wave of financial upheaval in Greece did not have very far to travel to drown its island cousin.  Still struggling from that issue, the credit downgrade was the spark that set the powder keg off and everything began to fall apart.

            Not one to let a comrade go to pieces, especially when it is so heavily invested, Russia loaned 2.5 billion Euros to Cyprus to be able to cover spending and refinance its debt.  This was a bandage solution, but a help nevertheless, until the European Financial Stability Facility gave them a bailout at the end of November, 2012.  The particulars of the bailout are fairly typical of any given one so I’ll spare the details.  The notable activity was the bailout from the European Central Bank and the IMF, which was in the amount of 10 billion Euros and, as part of the deal, took 6.7% of the amount in Cyprus bank accounts up to 100,000 Euros and 9.9% in accounts over 100,000 Euros. 

            What do you think when you think of Cyprus?  I always thought of fishing and I imagine most people do.  It may have been the national pastime back in the day, but I was surprised to learn that the populace is predominantly employed in service sectors related to tourism.  It is, after all, one gorgeous island nation.  Let me give you some particulars though.  Pulling numbers from the CIA’s World Factbook, I see that the country’s GDP is $23.57 billion (PPP) and the average gross salary is $2,636 per month.  Per capita GDP, also in purchasing power parity terms, is $26,900/year.  It has a population of 1,155,403, making it rank 160^th in the world.  It is considered a developed nation.  All in all, this is a small country and it’s crisis, while a big deal to them, does not really have repercussions in most of the rest of the world.  Remember the amount of the bailout?  I would venture a guess that 10 billion Euros is not a whole heck of a lot of money for the IMF considering that it holds claim to almost 11 trillion dollars worth of currency.  The biggest non-Cypriot consequences will likely be in Greece and Russia and any other folks they do major trading with, but the vast majority of the world goes on unaffected. 

            That is not to say that we in America should overlook this crisis because of the “creative” measures Cyprus has taken to make the bailout happen.  Recall the levy on bank accounts from above.  When I first heard about it I was first stunned beyond belief and then dreadfully (and hopefully irrationally) scared that this could become a common tactic.  Imagine a government reaching into its citizens’ bank accounts and taking their money!  Then I realized that… governments already steal their citizens’ money through taxes.  That is a whole other can of worms that will have to be opened some other time.  But for now, let us say that taxes are probably a necessary evil that we’ve all come to live with, but the idea of taking money right out of a bank account is just astonishing.  It’s really quite unheard of, quite an infraction of property rights, and sets a scary precedence now that this is on the table as a feasible option for ailing countries to solve their monetary crises.  That is not to mention the fact that they are taking foreigners’ deposits as well! 

            The Sicilian, from The Princess Bride, told us that the classic blunder is going into a land war with Asia.  We shall see now if Sicily’s neighbor on the other side of the Mediterranean accidentally started one by taking Russians’ money.  Perhaps desperate times require desperate measures, and I certainly won’t claim to know what will happen next, but it takes some level of desperateness to steal peoples’ money right out from their bank accounts and I suspect that a financial crisis is only the beginning of their troubles. 

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