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Thursday, March 21, 2013

Cyprus: Why Cyprus Should Blame Itself and not Merkel

No – it is not all Markel’s fault

(A Cypriot woman wearing a mask of the German Chancellor, Angela Merkel,
takes part in a protest against an EU bailout deal. Photo AFP)
Cypriot citizens and politicians are busy blaming German Chancellor Angela Merkel, the International Monetary Fund, the European Central Bank and the European Commission for all of their current problems.  Here is a contrarian view of what is happening.
They might do better to look in the mirror for a bit and wonder how things got so bad in the first place.

For one, Cyprus has been known as an off-shore tax haven for money laundering for years. As long as this worked to the benefit of Cyprus, no one there complained too much, even when the rest of the Eurozone did complain.  You cannot enjoy the benefits of hot or corrupt money and then complain about it when something goes wrong.

For another, Cypriot banks took much of the “non-resident Russian” money and used it to invest in Greek government bonds.  When the Greek government bonds turned out to be a bad investment, the severely over-leveraged Cypriot banking system began to implode.  Cypriot citizens might want to ask their government bank regulators why they let the banks make such high risk investments.

Finally, the banking system of Cyrus is, according to Eurogroup president Jeroen Dijsselbloem, five times the size of GDP.  Why did the Government of Cyprus let this happen?  The answer is that they took huge risks in using overseas money to grow their banking sector, but believed that nothing could go wrong and if it did, the EU would bail them out.

As the folks over at American Express say “Membership has its privileges.”  When you read the fine print, however, you also find out that membership has its costs and responsibilities as well. For Cypriots, they are now finding out that membership in the Eurozone can work both ways. 

Hello Cyprus!  Welcome to the reality of what happens when you look the other way at unethical practices. 

Other citizens in Europe and around the world might want to take a harder look at their politicians and bankers and ask them what they are doing. (Hello to Luxembourg!!  You could find yourselves in the position with all of your "non-resident" money flows.)

This is economics for the rest of us – and unfortunately – it is economics for the average Cypriot citizen that trusted his/her bankers and politicians.  The savers will get fleeced and the debtors will get bailed out.  Ouch!

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