Saturday, April 6, 2013

The new Beginining : Cyprus

Previously, In the Cyprus series : Cyprus : From Riches to Rags we saw how a small island which nobody knew before rocketed the news charts in few weeks. We discovered the reasons for rise and fall of this European nation and how government measures led to the misery of Cypriots.

Mar 25' 2013

Cyprus is in a state of distress. Its economy is on the verge of collapse. The EU bailout package ain't sufficient and the government has laid the burden on banks. Banks- already cash stripped are in no position to pay this grand from their own pockets and in turn have decided to levy taxes on savings of people - The very people who trusted them with their money and never dreamt of it being used to pay govt debts.
People are on streets. Some protesting, some angry. ATMs are out of order. Banks are closed so no one can withdraw their savings..
This indeed is a black day in the history of Eurozone. EU is worried about the precedent it will set for other countries if it let this happen. Cyprus govt is worried coz people on streets are furious.
The government finally comes to a decison. It shall reject this bailout plan and try find out a new alternative. Following this, Parliament rejected the bailout bill by EU.

17 billion euros is a huge debt to be borne by Cyprus Govt. In this event of misery their ain't any donors .

The government now has only 3 options.

1. Leave the Euro. Start a new.
2. Try renegotiate the bailout deal with EU.
3. Turn to Russians for help who perhaps are the major stake holders in Cyprus banks.

Lets dig deeper into these 3 options.

Leave the Euro. Start a new.
This means Cyprus will have to leave the Eurozone and establish a new currency , start a fresh. This will lead to a complete collapsal of existing economic system in Cyprus which indeed will make the situation worse. Rising unemployment, skyrocketing inflation and zeroing pensions will be too much to handle for an already  grief striken government. Option 1 ruled out. Consider option 2.

Try renegotiate the bailout deal with EU.
Well this seems to be pretty tough coz EU never wants any of its countries to separate out so it already offered a good bailout package.
Threatening EU to leave the Eurozone might however prove some help to Cyprus. But it seems pretty soon to try this out. Option 2 rethink later. Consider option 3.

 Turn to Russians for help who perhaps are the major stake holders in Cyprus banks
Russians have been a help before to Cyprus offering huge loans at below market rates of 4.5%. Besides they are major stake holders, they might prove some help.
So, Option 3 it is. Voila!

With this in mind, Cyprus Finance Minister Michael Sarris flew to Moscow to raise money for the debt crisis. However, he was promptly turned down.  Who wants to risk investing in an economically troubled nation?
Reverting back to EU for renegotiation seemed the only way out.

Over the weekend the Govt. of Cyprus negotiated feircly the deal with EU. It came close to Cyprus leaving Eurozone, but managed to attain a cease fire at the eleventh hour.

A new deal was laid out with new terms.

Country's second largest bank Laiki will be shut down.and all viable assured deposits below 100,000 euros will be transferred to country's largest bank "Bank of Cyprus." From now on this bank shall be considered more stable bank, Good bank. Around 4.2 billion euros of uninsured deposits shall be placed in the bad bank "Laiki" which will be disposed off to pay off the debt.
In order to safeguard the plan more capitalist rules shall be laid down on banks so that people cannot just take out all the money. Limits were placed on per day/per month withdrawal from bank. Cash withdrawal from check was banned. Limits to withdraw amount from ATM were also cut short.

What lies ahead?

If above measures help restore economy the stake holders might as well be able to recover the money in the process. But the question is even if Cyprus manages to pay the entire debt,  Will it be able to recover its economy anytime soon? The Russians have lost a lot of money. Cyprus is the last place on earth anyone would like to open an account in. Natural gas resources ain't yet operational. They cannot be yet relied on.
Tourism ain't at spur for disappointed Russians won't visit the place anytime soon.
The future still looks dim and unpredictable.

For all we can do now is sit back and Hope for peace!

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