In recent years, the Cypriot economy has become diversified and prosperous, however it suffered a major downturn in 2012 due to the banking crisis of the Eurozone. In June of 2012, the Cypriot government informed the Eurozone it would need a cash injection of nearly two billion euros in order to aid and support its economy, as well as the Cyprus Popular Bank.
Later in the year, the financial services authority Fitch announced it would be downgrading Cyprus’ credit rating to the infamous ‘junk status’, and recommended that it would need nearer to four billion euros in aid to support its faltering economy. Fitch firmly laid the blame of the woeful Cypriot economy at the hands of the Greek financial crisis, stating that the country’s banks were too ‘exposed’. Cyprus’ three largest banks, Hellenic Bank, Bank of Cyprus and Cyprus Popular Bank, all applied for aid from the European Union.
The Cypriot Economy
In terms of GDP, Cyprus is the third smallest economy in Europe, with Malta and Estonia taking first and second place. However due to the country’s ‘junk status’, it’s likely to be outgrown by Malta and Estonia towards the end of 2013. Although Cyprus’ GDP accounts for around two per cent of the Eurozone’s output, the country is still causing trouble for the surrounding economies.
Last summer, the Cypriot Government applied for nearly eighteen billion euros of emergency funding from the EU and IMF – that’s 100 per cent of its GDP. Although the aid package has the potential to kick start the Cypriot economy, and maybe even the Greek economy too, the package has been met with fierce resistance from major EU players, including the governments of Italy, France, Holland and the UK.
Many countries in Europe believe that the state of Cyprus economy is much to their own doing. There has been widespread criticism that the Cypriot economy is regulated by a ‘soft’ banking system, consisting of low-taxes and flawed business models. Furthermore, although the financial giants of Europe are trying to come up with a solution to Cyprus, they’re also concerned that the Eurozone’s reputation is up for question – namely by the rest of the world.
What emerges is an ultimatum – a new and revised Cypriot government that’s willing to increase taxes and fall into line with the rest of the Eurozone, or the possibility that other financial regulators like Fitch will start considering the credit rating of the Eurozone’s big cheeses.
Other Countries In Need Of Aid
Due to a dysfunctional public sector and excessive leverage in financial control, the Greek economy also collapsed last year, placing the Eurozone into further turmoil. Furthermore, Ireland’s real estate bubble finally burst last year, causing their banking system, and thus the country’s economy, to implode. If we look into the reason why the Cypriot economy collapsed, there are a number of similarities to Ireland and Greece.
When demand from Greece demand from Greece dried up, the strong business and trade links to Cyprus collapsed. This in turn caused tax revenues to diminish, and combined with shrinking house prices and large amounts of capital written off bank assets, Cyprus was in dire need of external funding.
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