Eurozone Meets Over Cyprus

Cyprus contributes just 0.2% to the economic output of the Eurozone, so the trials and tribulations that the island nation is experiencing should be viewed in the context of the bigger picture. Eurozone members, the IMF and ECB agreed a deal which would provide Cyprus with €10 billion of the €17.5 that they needed to avoid an imminent bankruptcy. The difference was to be raised by the Cyprus government and involved a controversial levy on the savings of bigger savers at Cypriot banks. EU law all but guarantees the first €100000 of deposits held in banks, but the levy (a one-off tax) would see up to 60% charged against the accounts of bigger investors – many of whom are Russian nationals.

In recent days, it has become clear that the loan may well be insufficient to get Cyprus out of trouble. It has been suggested that Cyprus may sell off a substantial proportion of its gold reserves, but this will “only” raise €400 million.

It looks as if Cyprus will need to find €23 billion to solve its problems. Eurozone ministers are meeting in Dublin to finalise the original bailout, but there may be no further help on offer to Cyprus – meaning it needs to find the additional €5.5 billion shortfall. The obvious source of this is larger investors. As originally proposed, such investors would be given shares in their banks equivalent to their contributions to the levy. This could work out to be a good long-term investment, but will present some investors (e.g. small businesses) with serious liquidity problems.

Cyprus has lifted most of the capital controls that it set in place at the heart of the crisis such that small businesses will have access to the funds that they need to operate.