Friday, April 5, 2013

Cyprus : From Riches to Rags

April 25,2013- Cyprus is the new buzz in air today. For few weeks ago from"where on earth is CYPRUS?" to "Lets save Cyprus." Perhaps a remarkable turn of events.
To all of those who wanna know what d hell is Cyprus crisis ,  Lets dig deep into this Cyprus history.



 So where is Cyprus? Why are we talking about it?
Cyprus is a small island in  Mediterranean sea, a part of European union accounting to a mere 0.2% of EU's GDP. With its  good chunk of  natural gas resources to the east of sea which are yet to be operational , CYPRUS is an offshore economic zone -  a Tax Haven.  It has more than 37% of its investors abroad, most of them being Russian criminals and fraudulents

 So much so money flows into Cyprus banks that they thought it a good plan to invest in greek bonds. Yeah!! u heard it right! The fools paradise - GREECE. Now why on earth will  anyone invest in doomsday economy?

Well , there were 2 reasons. One ,Cyprus been ethnically Greek , banks thought it to their natural advantage to invest in Greece. The other being high rate of interests on Greek bonds promised unrealistic returns. What the government failed to realize was that these returns were unrealistic in literal sense.How come a nation already defaulting on its debt will ever manage to pay back the returns?.




Months after, Cyprus banks were in bad shape. They owed more than they had and they owned a debt of 17 billion euros more than the country's GDP. Where on earth can government find such big money?


When in need we turn to our mother - EU , hope for a bailout and promise to learn from  our mistakes.

For poor Cyprus,  EU was already tired bailing out 4 nations and was in no mood to bailout this 5th one.
As per its  proposition - EU would lend 10-13 billion euros to Cyprus , rest all shall be borne by Cyprus govt.

Government had no money. Banks had neither. There could be only 2 ways to raise this sum.
1. Force government creditors - That is foreign and domestic lenders
2. Force bank creditors

For option 1, Forcing Government creditors meant forcing domestic lenders which are the very ones in need . So it all rounds up to option 2 .i.e forcing banks to pay for the huge debt.
Banks had  savings money.That is the investors money - perhaps the only money left in the country. People who were promised earlier that in no face of economic crisis will their savings be ever touched upon were soon going to be ripped off their trust. The time had come.  Government was about to rollback its word.The worst had come.

Government decided to tax the savings of people from 6 to 10% and pay the debt, get rid of the situation and appease these people for years to withhold their trust..
As soon as the word spread, people started panicking.
Withdrawing their savings seemed the only option.

Well !! Guess wat? Government ain't so lame to let you withdraw all that it had to save it from disastrous fate. 

Public holidays were declared for a week so that people couldn't withdraw their sums from bank. Withdrawal restrictions were put on ATMS which saw lines of people waiting outside to withdraw cash. To people's misery, ATMS soon went out of cash and the Catastrophe was finally ready to land on the shoulders of common people.

                                            Things will change.

Cyprus can threaten to roll out of EU group, can discard euro altogether and start afresh.Or it can ask Russians who are the majority stake holders in bank to help. Or  it can try renegotiate the deal with EU. What will be the turn over. Will Cyprus face the same misery as did Greece or will it some how manage a grraceful exit? To find out , checkout the next piece of Cyprus series :  The new beginning : Cyprus

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