cyprus default

Who Holds the Stronger Hand, Cyprus or the EU?

As I write this post a truly do or die meeting is taking place in Brussels to decide the financial fate of Cyprus and also its place within the Eurozone. With the rejection by Cypriot ministers of the initial bailout package (with much duress from the Cypriot people) and the farcical events that followed of bank withdrawal limitations and the return of Euro fear on the financial markets you have to wonder who really holds the stronger hand in this poker game between Cyprus and the EU?

At the beginning of the week after the Cypriot parliament rejected the terms of an initial bailout deal which, as you will likely know by now, included a levy on bank deposits of not only the savings of the financially well off but also the accounts of ordinary savers, it seemed that Cyprus had heroically stood up to the authorities in Brussels and retained their national pride. At that time it also seemed as though Cyprus had other options on the table. The government of Cyprus immediately went to the Russians to attempt to lure in some investment but to no avail. Then it appeared that other institutions in Cyprus might be willing to offer up the 6 Billion Euros that Cyprus so desperately needed, but again nothing conclusive was able to be finalised. All these efforts are now being put before EU ministers in last ditch talks to save the Cypriot economy but does Cyprus have anything to offer or will the size of its tiny economy ultimately make it dispensable to the Eurozone Project?

The Problem For The EU

The problem for the EU is that due to the size of the Cypriot economy, any sort of bailout seems to break all the rules of what an acceptable bailout should look like. It’s worth remembering though that when this whole Eurozone crisis kicked off, no kind of bailout was viewed as being acceptable and the rules have been rewritten again and again to keep the Euro project alive. It’s true that the Cypriot economy is tiny in comparison to the economy of the Eurozone as a whole but what Cyprus does have going for it is the fear of the unknown.

Let’s say that in tonight’s crunch meeting in Brussels EU ministers radically decide that because Cyprus has one of the smallest economies in the Eurozone they can afford to let it go, what would happen? Well the problem is that nobody really knows.

The stock markets might take it on the chin and decide that it’s not a big deal in the grand scheme of things, on the other hand they might freak out and borrowing costs might again start to rise for all the other risky Eurozone members including the larger economies of Italy and Spain. This might set the ECB up for a huge dilemma as it has promised to buy unlimited amounts of Eurozone debt to keep borrowing costs down.

Then there’s the issue of a crisis of confidence in European banks. It does seem that whatever the outcome of tonight’s meeting in Brussels, confidence in the EU banking system has taken a huge hit. Savers in all risky EU countries are now wondering whether their savings will one day be subject to a levy.

The outcome that gets me most interested though is the potential effects to the Eurozone Project if Cyprus were to leave the Euro and actually prosper as a result. Everyone knows that the short term effects of a default for Cyprus will be devastating to its economy. What would happen to the Euro project though if Cyprus was able to successfully return to its own currency, work through its problems and in a few years time prosper as a result? What would the people of the other Euro member states living under austerity think if this were to happen, would they then be itching to exit the Euro?

What do you think? Is Cyprus dispensable or does the EU need to keep Cyprus in the Euro at any cost?

Here are a few other great articles posted this week from my friends around the web:

Investing in farmland: my coconut investment ~ Pauline Over @ Reach Financial Independence talks about her alternative investments in farming and Coconut farming! Pauline also gave Money Bulldog a mention in her two recent blog carnivals  Carnival of Financial Independence, third edition & Carnival of Financial Independence, second edition so I’d also like to thank her for that.

What My Life Is Like With Terrible Credit ~ A Guest Writer on the Canadian Budget Binder gives a very honest account of living a life with a bad credit history.

Is it Time to Get Out of the Stock Market? ~ John @ Frugal Rules gives his views on the recent rise in the stock market and whether it’s time to jump ship? There have been so many different views on this floating around in the Blogosphere recently, I even wrote about it myself. Personally I think that investing with a long term view, as pointed out in this post by The Free Financial Advisor, means you’re less affected by the short term ups and downs of the market. However, I also feel that when it comes to investing timing is very important, I’m sure those who invested in March 2009 will be a lot happier right now than those who invested in April 2008, but that’s just my opinion.

Starting a blog ~ Do you consider yourself a writer? Jeremy @ Modest Money shows you how to start your own blog.

Loans Among Family Members; Is It Worth It? ~ One Smart Dollar gives us a warning about borrowing from family members.

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2 Responses to Who Holds the Stronger Hand, Cyprus or the EU?

  1. Thanks for the mention Adam! I don’t know about Cyprus, it’s definitely a tough call. I just hope that they avoid the plan they did have of “taxing” people bank accounts. That said, it’ll be interesting at the very least.
    John S @ Frugal Rules recently posted..Shout Out Saturday #10My Profile

  2. Pauline says:

    That Cyprus story is crazy. They completely took away the little trust people had in banks and now I bet the Greeks and Italians are all running to the bank to withdraw cash in case the same happens.. Like any club that wants to keep its standards, there are rules and if you don’t meet the criteria you should be out. No idea how that would look like though, but it could be a country like Montenegro that uses the Euro but isn’t part of the EU. thank you very much for the mention!
    Pauline recently posted..Little House in Guatemala, week 20-21My Profile

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