The economic crisis in Cyprus is unfolding very fast. Their banks are on the verge of collapse. The impact on Europe and the world could be devastating. The prospects for resolving this crisis appear dim.
So far the only news coming out of Cyprus has been bad news. Led by the Germans, the European Central Bank took a hard stand requiring immediate repayment of 5.8 billion Euros. If the funds are not repaid by Monday, March 25, the ECB will cut off financial aid to the largest banks in Cyprus, which means they could collapse soon after that.
It is hard to imagine how the ECB could have done a worse job handling this problem. Their mishandling of the crisis has increased the chances that Cyprus will ultimately withdraw from the EU. They showed no mercy demanding that funds be taken from the bank deposits of the people, including accounts below 100,000 euros. The brutal demands from the ECB have outraged the people of Cyprus. As a result, the parliament in Cyprus overwhelmingly rejected the ECB proposal.
Here are six reasons why Cyprus is the perfect storm:
- Cyprus came along at the wrong time. They are the fifth nation in the European Union to require a bail out. As a result, creditor nations like Germany have already had enough. Three years ago they would have been willing to bail out Cyprus. Today they are ready to make an example out of them.
- When larger nations like Spain, Portugal, and Ireland needed bailouts, European leaders were not willing to refuse to help them due to the risk of collapsing the union. The risk is far less in Cyprus, making it the ideal place to draw a line in the sand. Cyprus is the smallest nation in the European Union with total annual GDP of only 18 billion euros. So the European finance ministers are unwilling to compromise because they believe they can contain the damage. However, if the Cypriot economy collapses it will begin with their banks, which have assets ten times greater than the national GDP. At 180 billion euros, which is $234 billion, the risk of contagion is far greater than it appears to be. (Source: Cyprus Economic Policy Review, Vol. 5, No. 2, pp. 123-130, 2011)
- Cyprus banks are corrupt. They provide money laundering services for the Russian mafia. A bail out for Cyprus is therefore a bail out of the Russian mafia. This makes a bail out even more intolerable for creditor nations like Germany.
- German Chancellor Angela Merkel’s re-election is now only six months away. Her political opponents are licking their chops at the chance to accuse her of taking the hard earned money of the German people and giving it to the Russian mafia. She is therefore painted into a corner. She must take a hard stand on Cyprus. A compromise here would be political suicide.
- A line was crossed when the ECB and IMF demanded the confiscation of bank deposits. This sent shock waves throughout the world. Bank deposits are supposed to be risk free. They are not investments. So now people living in countries like Spain, Italy, Greece, Ireland, or Portugal are motivated to transfer their funds to a safer place. The flight of capital leaving these countries would be disastrous to the banks.
- If other European nations were economically strong, the problems in Cyprus would not be cause for alarm. However, Europe is a house of cards. Banks are loaded with dangerously high levels of sovereign debts. If not for ongoing injections of capital from the ECB, large banks throughout Europe would have already failed. In this scenario, a small wind from tiny Cyprus could be enough to collapse the house of cards.
Cyprus appears to be the perfect storm that could topple the European Union and the euro.
Author: James Bailey
James Bailey is a blogger, business owner, husband and father of two grown children. In 1982, he surrendered his life to the Lord Jesus Christ. In 2012, he founded Z3news.com to broadcast the message of salvation by reporting end time news before it happens.
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