Q. Explain what has happened to Cyprus the past months.
It was only a matter of time before the escalation of tension between the people and the state becomes visible. On Wednesday 20th march 2013, Cyprus announced of its banks remaining closed until maybe next week. This has been received by physical confrontation of the public. Protesters, including employees of Cyprus popular bank, scuffled with the police on Thursday outside the nation’s parliament. The nation has suffered economic recession and desperately needs a bail out.
The overall effect is called the 2012-2013 Cypriot financial Crisis. The banks of Cyprus were exposed to the Greek debt haircut, as well as the economy was downgraded to junk status by international rating agencies. The government was also unable to refund the expenses of the state. (Rana e.t.l 45)
The major precursor was the a domino effect of negative consequence, following United States sub-prime mortgage crisis. The Cyprus economy contracted thereafter, welcoming a recession.
The country requested a bail out from the European Stability Mechanism on 25/6/2012. This showed it had some difficulties in easing Greek debt hair cut on its banks. A €10 billion deal was then agreed by the IMF, ECB and EC on Cyprus issue.
Q. What is to come in the future for the country?
The future is at stake, especially after rejecting the bailout offer by the European bank. The political leaders are looking for ways of raising the multibillion dollar deficit. If this amount is not obtained, the European central bank will happily cut off funds to the troubled banks in Cyprus.
The future looks uncertain. There are spontaneous protests, including many bank employees. The savings of many investors is at risk and also their jobs. This means massive unemployment is expected especially in the financial sector.
There is a possible Euro zone break up, where Cyprus can start issuing its own currency. Capital flight is likely to occur and also investors might leave. If the situation worsens, a large number of investors will move to withdraw their money from Cyprus bank. This will lead to total collapse of the financial sector in Cyprus.
In the same scenario, hyperinflation is likely, and the citizen will have difficulties obtaining basic necessities. The country could prevent cash from leaving its borders and commerce will come to a halt.
Q. How it affects and will affect the European Union?
First of all, the EU-Russia ties are held together by Cyprus. Russian has large deposits of money in Cyprus banks. The rejection of the idea of a rescue plan by the European banks infuriated most Russians. This could result in a thin line between the EU-Russia tie.
This crisis could also cause a domino effect in the Eurozone. This comment was made by Ambassador Vladimir Chizhhov. The decision includes a one-off tax on bank accounts. This indeed is like a forceful expropriation. It can trigger a domino effect on other countries as it creates a risk of a run on Cypriot banks. That is why Russia is very interested in the developments. ( Fingleton 01)
The messy decisions of the past have already shaken the confidence in the euro currency union and Cyprus as such. A rush to withdraw by investors could stimulate the collapse of the financial sector of Cyprus, and also affecting Euro zone as well.
The country’s economy is just 0.2% of Eurozone, but its financial sector, heavily connects to Greece. Any collapse will be transferred to Greece. If Cyprus stays in the euro zone, some countries like Greece might leave due to fears due to a potential rise in cost of bond markets. ( Lin e.t.l 65)
Depositors across Europe will rush to withdraw in case of a potential future crisis. The account holders of some other troubled countries like Spain will remain unsettled as such. In fact, Cyprus had thought of confiscating bank deposits below insured limit of hundred thousand euros. This clearly breeds doubt in account holders.
Q. Turkey has been trying to become part of the EU. How has, what happened to Cyprus affect the entrance?
The history of joining has been long and convoluted. Turkey might hold off the deal and never to become a member. It might as well join with extra precaution. This is due to the predictable instability of the Eurozone economy. The country might opt to invest more on real assets and less on liquid assets.
It remains a two way road. If Cyprus is kicked out, turkey might be willing join, assuming that Cyprus was the barrier. A gain, turkey can give it a deeper thought, delaying or even disallowing its entrance. Turkey can choose to study the Eurozone crisis, the emerging trends and take precaution before joining.
The handling of Cyprus could have volumes of impact on the Turkey joining. The inability of the European Union to come up with a credible solution might mean that Turkey will not trust the move as the wise one. The move could affect the commerce and business trends, as people in turkey might want to hold onto their money or event convert it into tangible assets.
Cyprus finds itself at the brink of financial collapse. Many depositors are keen to learn their fate together with bank employees. The word is watching. Only credible decision by Cyprus and the Eurozone in general will save the future. It is likely that a compromise might be struck along the way.