FX eurozone they immediately risk provoking
a collapse in economic activity in a country where net exports in financial services, travel, transport and tourism constitute almost 50% of GDP. Te country will also go through a massive credit crunch since the further reduction of its oversized banking sector, in the order of seven times GDP to the EU-average of three times GDP, is another key element of the bail-out program.
Russia could not and would not help
In the midst of an effective shutdown of the country’s banking and payment system, its finance minister ventured a trip to Moscow in a search for help. A Russian loan would, however, have jeopardised EU-IMF financing since it would not have resolved the issue of the country’s long-term debt sustainability. Moscow could of course, through one of its state-owned banks, have taken a direct stake in Cyprus’ troubled banks, maybe by negotiating a claim on the future revenues of the country’s deepwater gas reserves, and/ or ensuring a new Mediterranean deep sea port for its navy (in the distinctly possible event that it loses its current facility in Tartus, Syria). Clearly, this would have been only the beginning of a series of very costly Russian investments with highly uncertain outcomes, involving potential disputes with Turkey, Syria, Israel, Lebanon, Greece, the United Kingdom and the
10 FX TRADER MAGAZINE April - June 2013
United States, in addition to the EU. Russia was never likely to go that far.
Cyprus’ new economic nightmare Te credibility
of Cyprus impose Argentine-style as an
offshore banking sector, which mainly caters Russian clients, is now all but gone. Te government is forced to
deposit
freezes and capital controls. Yet, while such measures will only temporarily deter substantial capital flights,
Since the inception of the debt crisis, Greek GDP fell by almost 30%. Sadly enough, Cyprus is now on a similar multi-year depression track. And as disappointing growth will negatively affect fiscal revenues, we are likely to observe renewed negotiations in the run-up of planned bail-out tranches. Some form of debt forgiveness might be the final outcome.
Cyprus frozen euro casts a
doubtful shadow over further monetary integration
Te effective utilisation of the country’s small deposits will now be
Chart 1 – Private Credit to GDP Ratio (%), average 2008-2010
Sourse: World Bank
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