As mentioned in a previous article (Cyprus bailout) an 11th hour agreement was made late on Sunday - but what does it actually mean in the long run? Has this €10bn solved all Cypriot problems? Or will we be back here again in 6, 12 or 24 months time?
Well for me this €10bn has simply helped a symptom, not provided a cure. It does not seem to have changed anything structurally that will lead to Cyprus kicking on as an economy, instead it has weakened their financial sector and probably deterred foreign investment.
Historically when nations have gone bust they have defaulted on their payments and suffered short term pain. From here, they have been able to repair; they have no debt burdens to now pay and also have suffered a devaluation in currency thus supporting exports from the country. Of course it has not been this straightforward and the population have faced tough times, but eventually they have managed to recover. What we are seeing in Europe seems to be providing further emergency loans, imposing strict austerity measures and keeping the nation in the Euro, thus not allowing them to devalue their currency and start again. Cyprus is a very small Eurozone nation, but what will happen if Italy needs bailing out, or worse still France? They will require huge bailouts which just may not be feasible.
There is no easy fix, but at some point something has to give. We either need full fiscal and monetary union, or countries need to leave the Euro and return to their own currency. The key to countries leaving the Euro would be a managed, orderly break up, although this is likely to still lead to market turmoil and banking crisis.
The Eurozone problem is probably the greatest world economic challenge currently, and although I don't have the answers, throwing good money after bad doesn't seem the way forward. We need to provide stability in the banking system and find a way for the weaker nations to become more competitive, an edge they have lost since having a single Euro currency.
For now let's just hope the U.S, and the rest of world can help pull Europe out of this mess, and consider a global portfolio of equities! Euro stocks may be cheap, but it could be for a good reason!
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For those following events in Europe (and I assume someone beside me is) the full implications of what is happening in Cyprus is beginning to register..
ReplyDelete“The problem is not solved and some bad things are going to happen in the next six months,” said Maria Philippou, 45, a civil servant in Nicosia and a mother of three. “The leaders are to blame in Cyprus and the European Union. They let the bankers do whatever they wanted.” Here is the clincher: "The deal imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank (CPB) as it’s wound down." What does that mean? It means that many small businesses and more prosperous middle class depositors will lose about half their money, and in a much more serious blow to confidence, they will lose this money on the order of EU ministers! This a major "crossing of the Rubicon". Depositors in Europe know this is the point of no return...once the governments begin to not only allow but encourage the breaking of contract between depositor and bank, bank depositors have no defense against the sacking and robbing of their deposits. THIS IS BIG. That such a thing would have occurred in Europe would have been inconceivable only a couple of years ago. We are witnessing history and not the good kind...
Some good points made. More worryingly is the recent actions by the EU commission and IMF provide the people of those ailing countries more incentive to vote in an anti austerity government as they may fear the worst for their deposits. Certainly one to keep a close eye on.
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