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For Euro Zone, a Cyprus Exit Would Have Little Impact For Euro Zone, a Cyprus Exit Would Have Little Impact
(about 4 hours later)
LONDON — Forget about a Grexit. What about a Cyprexit? Forget about a Grexit. What about a Cyprexit?
A messy Cyprus exit from the euro currency union would have a devastating effect on the country’s citizens, who are among the most indebted in the euro zone. And for European unity and diplomacy, the Cyprus debacle has already been at least a short-term disaster. A Cyprus exit from the euro union, if it comes to that, would have a devastating effect on the country’s citizens, who are among the most indebted in the euro zone. And for European unity and diplomacy, the Cyprus debacle has already been at least a short-term disaster.
But for the broader financial system in Europe, the losses resulting from a Cypriot banking collapse and the country’s return to its own currency would be minimal compared with the havoc that Greece would have created had it not been bailed out and instead returned to the drachma last year. But for the broader financial system in Europe, the losses resulting from a Cypriot banking collapse and the country’s return to its former currency would be minimal compared with the havoc that Greece would have created had it not been bailed out.
And that, economists and investors contend, is precisely why Germany and its Dutch stalking horse, Jeroen Dijsselbloem, the uncompromising leader of Eurogroup of finance ministers were so adamant that depositors — large and small, Cypriot and Russian — contribute €5.8 billion, or $7.5 billion, toward the €10 billion bailout of Cyprus’s largest banks. And that, economists and investors contend, is precisely why Germany and its Dutch stalking horse, Jeroen Dijsselbloem, the president of the Eurogroup of finance ministers, were so adamant that depositors — large and small, Cypriot and Russian — contribute 5.8 billion euros ($7.5 billion) toward the 10 billion euro bailout of Cyprus’s largest banks.
Greece may well have been too big to fail last year, but Cyprus, which creates less than one-half percent of the euro zone’s gross domestic product, is certainly not.Greece may well have been too big to fail last year, but Cyprus, which creates less than one-half percent of the euro zone’s gross domestic product, is certainly not.
From a financial standpoint, what is most noteworthy is that the combined debt of the Cypriot people, companies and government is 2.6 times the size of the country’s gross domestic product. Only Ireland, still struggling to recover from the banking collapse that required an international bailout in 2010, has a higher debt-to-G.D.P. ratio among euro zone countries.From a financial standpoint, what is most noteworthy is that the combined debt of the Cypriot people, companies and government is 2.6 times the size of the country’s gross domestic product. Only Ireland, still struggling to recover from the banking collapse that required an international bailout in 2010, has a higher debt-to-G.D.P. ratio among euro zone countries.
As debts in Europe mount in inverse proportion to the ability of its citizens, companies and governments to make good on them, the view is forming in Berlin and Brussels that — especially in the wake of the latest Greek rescue — a signal must be sent that for the euro zone to survive in the long run, citizens and investors must start accepting losses. As debts in Europe mount in inverse proportion to the ability of its citizens, companies and governments to make good on them, the view is forming in Berlin and Brussels that — especially after the latest Greek rescue — a signal must be sent that for the euro zone to survive in the long run, citizens and investors must start accepting losses.
“There have been too many bailouts in Europe; it’s time to remove the air bags,” said Stephen Jen, a former economist at the International Monetary Fund who runs a hedge fund based in London. “This is not a Lehman,” he said, referring to the disastrous chain reaction triggered by the collapse of Lehman Brothers in 2008. “There have been too many bailouts in Europe; it’s time to remove the air bags,” said Stephen Jen, a former economist at the International Monetary Fund who runs a hedge fund in London. “This is not a Lehman,” he said, referring to the disastrous chain reaction touched off by the collapse of Lehman Brothers in 2008.
With Cyprus, “the links are psychological, not mechanical,” Mr. Jen said. “In Greece the links were both mechanical and psychological.”With Cyprus, “the links are psychological, not mechanical,” Mr. Jen said. “In Greece the links were both mechanical and psychological.”
Eric Dor is a French economist who has studied in detail the mechanics of how a country might remove itself from monetary union. By his calculations, the euro zone — via its central banking system and its national banks — has just €27 billion in outstanding credit exposure to Cyprus. That is a mere rounding error compared with the overall euro zone G.D.P. of €9.4 trillion. Eric Dor is a French economist who has studied the mechanics of how a country might remove itself from the monetary union. By his calculations, the euro zone — through its central banking system and its national banks — has just 27 billion euros in outstanding credit exposure to Cyprus. That is a mere rounding error compared with the euro zone G.D.P. of 9.4 trillion euros.
Estimates of the potential cost if Greece had been forced into a disorderly euro exit have ranged from €200 billion to €800 billion, given the much larger exposure that the E.C.B. and European banks had to the country. Estimates of the potential cost if Greece had been forced into a disorderly euro exit have ranged from 200 billion euros to 800 billion euros, given the larger exposure that the European Central Bank and European banks had to the country.
“This explains why Germany and others are putting so much pressure on Cyprus,” said Mr. Dor, head of research at the Iéseg School of Management in Lille, France. “They are saying we can take the risk of pushing Cyprus out of the euro zone, and that Europe can take the losses without going broke.”“This explains why Germany and others are putting so much pressure on Cyprus,” said Mr. Dor, head of research at the Iéseg School of Management in Lille, France. “They are saying we can take the risk of pushing Cyprus out of the euro zone, and that Europe can take the losses without going broke.”
Mr. Dor notes that the current euro zone-wide system of insuring bank deposits up to €100,000 was put in place following the financial panic that followed the Lehman collapse. Those deposits are supposed to be insured by national governments. Mr. Dor notes that the current euro zonewide system of insuring bank deposits up to 100,000 euros was put in place after the financial panic that followed the Lehman collapse. Those deposits are supposed to be insured by national governments.
So when the president of Cyprus admitted this week that his country did not have the funds to backstop the €30 billion of guaranteed bank deposits — a figure greater than the Cypriot economy itself — a crucial bond of trust between a government and its citizens was snapped. So when the president of Cyprus admitted this week that his country did not have the money to backstop the 30 billion euros of guaranteed bank deposits — a figure greater than the Cypriot economy itself — a crucial bond of trust between a government and its citizens was snapped.
“It is the first time ever that the leader of a euro zone country has admitted that he could not afford to pay the guarantee,” Mr. Dor said.“It is the first time ever that the leader of a euro zone country has admitted that he could not afford to pay the guarantee,” Mr. Dor said.
By that reckoning, whatever grievances the Cypriot people have toward the euro zone finance ministers might be better directed toward their own national leaders who have failed to protect their savings. A hasty expulsion from the euro zone would make the savings of the Cypriot people all the more evanescent, once they are converted back into Cypriot pounds, the currency Cyprus used before adopting the euro in 2007.
A hasty expulsion from the euro zone would make those savings all the more evanescent, once they are converted back into Cypriot pounds, the currency Cyprus used before officially adopting the euro in 2007. Analysts project that the de facto devaluation would be not only immediate — estimates range from 30 to 40 percent — but extremely punitive, given the high household and corporate debts that burden Cypriots.
Analysts project that the de facto devaluation would be not only immediate — estimates range from 30 percent to 40 percent — but extremely punitive, given the high household and corporate debts that burden Cypriots.
That means that in addition to Cyprus’s defaulting on its debts, many individuals and small businesses, the backbone of the country’s economy, would go bankrupt and the country would face a depression that could rival Greece’s in its severity.That means that in addition to Cyprus’s defaulting on its debts, many individuals and small businesses, the backbone of the country’s economy, would go bankrupt and the country would face a depression that could rival Greece’s in its severity.
“You would see genuine poverty in a euro area country,” said Gabriel Sterne, an analyst at Exotix, a London-based investment bank that specializes in distressed debt.“You would see genuine poverty in a euro area country,” said Gabriel Sterne, an analyst at Exotix, a London-based investment bank that specializes in distressed debt.
Nevertheless, the anger and frustration among Cypriots toward Berlin and Brussels is such that in a recent poll, 91 percent of respondents said they would rather leave the European Union than submit to the deposit taxes demanded of them.Nevertheless, the anger and frustration among Cypriots toward Berlin and Brussels is such that in a recent poll, 91 percent of respondents said they would rather leave the European Union than submit to the deposit taxes demanded of them.
Suddenly, just six years after having adopted the euro, economists in Nicosia are dusting off their currency-assessment models to better understand what the immediate economic impact might be if the Cypriot pound were to be reintroduced. They conclude that while Cypriots exports would be cheaper for foreign buyers, the cost of imports would skyrocket. Suddenly, just six years after having adopted the euro, economists in Nicosia are dusting off their currency-assessment models to better understand what the immediate economic effect might be if the Cypriot pound were to be reintroduced.
Imported oil in particular would soar in price, with profound economic impact because oil is used to produce electricity that already costs more than almost anywhere else in Europe, according to Alexandros Apostolides, a local economist who is engaged in just such a study. They conclude that while Cypriot’s exports would be cheaper for foreign buyers, the cost of imports would skyrocket.
Already, Mr. Apostolides, points out, there are hints that Cypriots are bracing for the inflation that would accompany a devalued pound: Many proprietors are now demanding cash upfront, and refusing to accept credit and debit cards. The price of imported oil in particular would soar, with profound economic impact because oil is used to produce electricity that already costs more than almost anywhere else in Europe, according to Alexandros Apostolides, a local economist who is engaged in just such a study.
Already, Mr. Apostolides, points out, there are hints that Cypriots are bracing for the inflation that would accompany a devalued pound: many proprietors are now demanding cash, and refusing to accept credit and debit cards.
For all that, he says, there are many in Cyprus who still have a fond memory of the pound, which unlike the volatile drachma, was always a stable currency.For all that, he says, there are many in Cyprus who still have a fond memory of the pound, which unlike the volatile drachma, was always a stable currency.
“I think we are really underestimating the shock that will come,” Mr. Apostolides said. “But people have seen the death cycle of Greece.”“I think we are really underestimating the shock that will come,” Mr. Apostolides said. “But people have seen the death cycle of Greece.”
And Cypriots feel they have been blackmailed by the European Central Bank’s vows to cut off essential low-interest loans to the country’s banks, unless Cyprus quickly agrees to Europe’s bailout terms, he said. “That is a very dangerous mix.” And Cypriots feel they have been blackmailed by the European Central Bank’s vows to cut off essential low-interest loans to the country’s banks, unless Cyprus quickly agrees to Europe’s bailout terms, he said.
“That is a very dangerous mix.”