What Went Wrong in Cyprus?
One of the biggest financial stories in recent weeks is the bankruptcy of several large banking institutions in Cyprus and the methods needed to bail them out. I don’t want to talk about the methods for solving the financial crisis but analyze the reasons behind it. It’s an interesting case and in the United States you don’t see too many Democrats or Republicans lining up to blame each other, there’s a reason for that.
Cyprus has a long and complex history but the parts that pertain to our story have to do with its politics and economics. Politically it is split between a Turkish faction and a Greek faction dating back to the 1974 when the country reunited after an invasion by Turkey split the region. The Turkish part of the island is allocated seats in the government but refuses to take them because they will not acknowledge a Greek government.
The country is what we would call socialist or liberal in many regards but not in a special few. As of 2002 Cyprus has the lowest corporate tax rate in Europe and is considered very business friendly. It has become a hub for foreign investment because of few restrictions. Many Russians and other eastern tycoons placed huge sums of money in its banking system because of the tax friendly status. Thus it is an odd mix of what people call Conservative and Liberal.
They have also recently had an energy boom thanks to deposits of natural gas found offshore. They have little other than that as a natural resource and derive much of their income from tourism.
So, with all this business friendly, low-tax conservative money policy, why are they bankrupt?
Much of the money that was coming in was given back out in what eventually became bad loans. Thus the banks went bankrupt much as they did in the United States. They also have a public debt of 84% of the GDP which is one way to determine, with modest accuracy, how much they owe. This means despite lots of economic growth prior to 2012, when the crisis hit, they were still in debt.
The reason we don’t see an uproar among conservatives to raiding the savings accounts of citizens to bail out the banks is that a lot of very wealthy people have their money in Cyprus banks and they don’t want to lose it. The reason we don’t see liberals decrying the situation is that even with excellent economic growth a liberal government was still in debt. Neither system worked.
My point here is that the economic system as it stands is unsustainable with any model. We insist on growth with flattening populations and when we don’t get it, make it happen through stimulus packages. We loan money to aid growth and count on being paid back with interest. There is currently so much debt that much of that money will never be repaid. The few countries not in debt will be driven into it because the money they supposedly are owed will not be repaid. If everyone is in debt then no-one can make payments. It’s that simple. There is no money.
I don’t want to devolve into a conversation about how to solve the situation, I just wanted to point out an instructive event currently taking place in Cyprus. If you are a Democrat or a Republican I urge you to look at the situation closely and make a particularly hard examination of the policies you endorse. We must stop bickering over which failed policy we want to pursue, it gets us deeper into trouble.
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