Bailout of Cyprus - Research Paper Example

Cyprus Bailout Presented to Cyprus Bailout Cyprus has currently joined the league of countries such as Greece, which are in deep debt turmoil and need a bailout to salvage their economies from recession. The problems behind Cyprus economic turmoil have stemmed from its banking sector, which is heavily reliant on Greek’s economy, but many analysts believe that Cyprus has been suffering for fiscal imbalances that needed urgent addressing (Telegraph, 2012). The two main banks in Cyprus suffered greatly from the Greek’s sovereign bond write down, which had major backing from the EU members Cyprus included.

The two banks lost more than 2.3 billion Euros on Greek sovereign bond, which they asked the state to fill in their regulatory capital (Telegraph, 2012). In addition, Cyprus’ economy had been described as a “Casino economy.” In other words, the country has a banking sector much larger than the country’s gross domestic product. This has been said to be negligence in following the banking rules, making everyone else vulnerable to such economic crisis (Erlanger & Kanter, 2013). Another major problem according to Erlanger & Kanter that led to Cyprus economic crisis is the threat by Euro zone countries to confiscated significant part of the savings of Cypriot banks’ depositors.

The result was that large depositors and ordinary savers in such banks were uncertain about their savings. The private sector was therefore more reluctant to steer more funding to financial institutions in trouble as in the case of Cyprus, which increased the need for the country to look for a bailout from the European Central Bank. Cyprus problems also emanated from the country’s wage bill which as analysts explain is the highest in the Eurozone, implying the country similar to Greece has a lavish life where their GDP is much less than their net expenditure.

Cyprus bailout has attracted differing views from policy makers and economists. The bailout has been described as a major victory from Eurozone hardliners such as Germany. The hardliners have over the time made it clear that countries only qualify to be rescued in case they acknowledge and do penance of their past mismanagement as would be determined by their rescuers (Erlanger & Kanter, 2013). The argument is that such bailout will have a higher public support for the euro and demand for greater prudence from other countries.

However, the critics of the bailout explain the entire arrangements were haphazardly carried out to an extent that it “underscored the chaotic nature of European decision making more than sending a message regarding a new approach to bailouts” (Erlanger & Kanter, 2013). In addition, some analysts have focused that the crisis in Cyprus will lead to major financial fears in the Eurozone, and this could cost Europeans growth stagnation than they would stand to gain in savings away from the bailout.

Critics have also expressed their concerns regarding investors’ pessimism in requiring savers to use their hand earned cash to bailout banks in the euro zone, largely due to gross mismanagement and bad policies in such institutions as in the case of Cyprus banks. The Cyprus government is trying to salvage the situation through attracting more investments in Cyprus, which is a positive move and would aid in strengthening the country’s economy further. Recently, Demetris Chrisofias the Cyprian president had discussions with his Russian counterpart President Putin to discuss issues regarding further economic cooperation, which was understood to mean increased investments in Cyprus (Erlanger & Kanter, 2013).

However, Cyprus and Russian economic ties have been observed with much jittery by analysts. The Cyprus government had sought to protect major investors with more than 100,000 euros from high taxation, a move that was perceived by analysts as a strategy to save Russian money in Cyprus, discouraging further bailout by Eurozone countries such as Estonia, and from critics of Russian money laundering (Erlanger & Kanter, 2013). However, the Cyprus government does not portray any intention of carrying out major austerity measures in cutting down government spending as was in the case in Greece.

ReferencesErlanger S., & Kanter J., (2013). Stricter Rules but Signs of Disarray in Cyprus Deal, The New York Times, 25th March http://www.nytimes.com/2013/03/26/world/europe/cyprus-bailout-shows-strictness-but-signs-of-disarray.html?pagewanted=all&_r=0 The Telegraph (2012) Debt crisis: Troika finds Cyprus in worse state than expected, 6th August. http://www.telegraph.co.uk/finance/financialcrisis/9455790/Debt-crisis-Troika-finds-Cyprus-in-worse-state-than-expected.html