Cyprus financial woes could set Eurozone precedent

Mar 26, 2013 | News

By Petros3 via Wikimedia Commons

By Petros3 via Wikimedia Commons

By Amber Daugherty

Cyprus is experiencing increased protests after recent financial trouble has left some people unable to access their money, some looking at possible unemployment, and some businesses struggling.

The economic chaos that’s erupted on the eastern Mediterranean island nation is also setting a concerning tone for other Eurozone countries grappling with economic issues.

“The contagion effect is what to worry about,” Steven Kyle, macroeconomics expert at Cornell University’s Dyson School of Applied Economics and Management, told Humber News on Tuesday.

“It doesn’t affect Europe directly because Cyprus is too small,” Kyle said. “But this could now happen in Italy or Spain or some other country that’s big enough to crash the whole thing.”

After agreeing to a bailout on Monday with the European Union, the country announced a possible new plan where anyone with investments worth over €100,000 ($131,000 Cdn) could see up to 40 per cent of their money taken by the government, and converted into bank shares.

Banks have been closed in the country for over a week, and are expected to open again Thursday. There was initial concern depositors would withdraw all their funds.

Financial analysts are predicting a run on the banks when they open later this week. Experts say the trust is gone. While banks have been closed this week, some ATMs have been operating, but with a withdrawal limit of around €100 ($130 Cdn) a day.

“If I were a depositor at a Cypriot bank, as soon as they reopened the banks, I would say ‘You taxed me 40 per cent, well the other 60 per cent I’m taking right now and I’m running,’” Kyle said.

Kyle said the situation may change the way Europeans think about investing money.

“They established a precedent for the rest of the Eurozone that they’re not just going to bail out the banks, they may screw the depositors too to get some of the money they need to recapitalize,” he said.

Jeroen Dijsselbloem, head of the Eurozone’s finance ministers, quickly retracted a statement he made Monday, saying Cyprus’s bailout could be a template for future crises, the BBC reported.

On Tuesday, the head of the country’s biggest bank resigned, and Michael Sarris, Cyprus’s finance minister, said the country’s exit from the Euro wasn’t an option, though it had previously been discussed.

The country, which has gone into financial chaos and was forced to consider bankruptcy, agreed to a €10 billion ($13 billion Cdn) bailout on Monday with the European Union.

“It’s not just economics; it’s politics too,” Kyle said.

The issue in Cyprus is affecting foreign investors as well, and will most likely hit them the hardest as they have the most money invested in banks.

Kyle compared Cyprus to North America’s Cayman Islands, calling it “a tax free haven for people to put their money with no questions asked.”

“The biggest chunk of foreign money was from Russian gangsters and nobody really knows the details of that because they don’t collect information; that’s one of the attractions,” he said.

With the bank closure, and the possible loss of investors’ money, Kyle said he’s not sure those investors – or any new ones – will put more into the country.

“The main industry is gone because nobody’s going to regard Cyprus as a safe place to put money ever again,” he said.

Cyprus’s finance minister is drafting new cash controls that would limit euro exports and ban cashing cheques to prevent a run on banks when they reopen.

In the meantime, students are protesting, bank employees are looking for new jobs as they will almost definitely lose theirs, and investors are closely watching their money.

And while the issues in Cyprus aren’t directly affecting Canada, Kyle said there’s a chance that if they escalate, we could feel the effects at some point.

“If they have a deep depression or financial chaos over there, it’s going to affect us because they’re a huge trading partner for us,” he said.

“If the euro falls apart, that’s going to have effects on everybody.”