Having written an opinion on austerity measures in South Europe I think it is time to focus on the current problems faced by Cyprus. Although its government states that it has money to hold until September (other sources state that it has money to make it until the end of the year) it is common knowledge that the island is bankrupt. For more information on the situation read this article by Wolf Richter where the nation's current situation is outlined. Prospects appear as dark as they can get while the Troikans believe that the island will need about 10 billion euros to cover it's needs (both for the fragile banking system as well as for a black hole in it's finances).
The Cypriot government is headed by a President whose communist views have spurred controversy even amongst its European Allies and who seems unable to commit to actions that will alter the situation. The only moves that have been made towards fixing public finances were done in September and December 2011, by a Finance Minister (Kikis Kazamias) who resigned in March stating "medical reasons". However, the Cypriot President, Demetris Christofias, despite his growing unpopularity even amongst its own party, has requested that the structural changes that need to be done in the Cypriot economy should span over the next 6 years and not over the next one.
For once, I do believe he has the right idea, although for the wrong reasons. His reasons are strictly political as he must think, and many others in his place would have thought the same, that the effect of strict fiscal discipline will be devastating for the future of his party. With elections coming on February 2013 he has every reason to be worried. (However, I don't think that this will do much more harm to his reputation than he has already caused to himself by his inability to face reality).
My reasons are strictly economic. Changing fiscal policy so rapidly will cause a wave of new issues to the already problem-ridden island. Cyprus has one of the highest private debt ratios in the world of about 300% of the GDP. Add to that an exposure of about 40% of the Cypriot banks' loan portfolio to Greece and an economic confidence level at its lowest since they have started compiling one, and you get an explosive package. So, if one may ask, what happens when to a country with a 300% of GDP private debt when fiscal policy is abruptly tightened without an expansion of credit? Well, I guess (the troikans can verify this if they can) that foreclosures, bankruptcies, a confidence level even lower and unemployment levels reaching 15-20% are the logical consequences. After that, you can understand that the next victims are the banks themselves.
Cyprus Popular Bank, the second largest bank on the island has led already agreed with 185 employees on a "voluntary" retirement scheme. This would help it fulfill a target of reducing employees by 7% this year. The rapid and rather stupid expansion of Cypriot banks in both Cyprus (Bank of Cyprus, the leading bank of the island has about 120 branches in a nation where the total area is less than 6,000 square kilometers. The same numbers more or less hold for Laiki Bank. However the exaggerations in both banking and fiscal policies must not be revoked immediately as this would not bring the island to the brink of destruction - it will push it over the cliff.
If the austerity measures are pursued with severity and results are expected from the first year of imposition the island will need another group of Troikans until next year to hand over several billion more to save them.
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