Did Cyprus become an economic basket case because it is a tax haven, as some leftists have implied?
Did it get in trouble because the government overspent, which I have suggested?
The answers to those questions are “no” and “to some degree.”
The real problem, as I explain in this interview for Voice of America, is that Cypriot banks became insolvent because they made very poor investment decisions, particularly their purchases of Greek government bonds.
A few additional points.
1. The mess in Cyprus won’t cause problems in other nations, but it may lead investors in other nation to pay closer attention to whether there are problems with the government and/or banking sector.
2. There is not a “European problem” or “euro problem.” Some nations, such as Switzerland and Estonia, have made sound decisions. Others, such as Sweden, Denmark, and Germany, are in decent shape.
3. The final outcome in Cyprus was bad, but probably less bad than other options. The final result surely was better than the corrupt TARP regime in the United States.
4. It is utterly absurd to blame tax havens for the financial crisis. That disaster was caused by mistaken decisions by politicians in Washington.
So what happens now? I fear that Cyprus is going to be like Ireland, a nation that used to have a few attractive policies but now will have a bleak future.
[…] long-run increase in the burden of government spending. Combined with the fallout caused by an insolvent banking system, Cyprus suffered a deep crisis earlier this […]
[…] long-run increase in the burden of government spending. Combined with the fallout caused by an insolvent banking system, Cyprus suffered a deep crisis earlier this […]
[…] so some nations will have moved up or down since then. I would be very surprised, for instance, if Cyprus was still in the top 10. And it’s quite like that the U.S. score dropped as well, thanks to […]
[…] so some nations will have moved up or down since then. I would be very surprised, for instance, if Cyprus was still in the top 10. And it’s quite like that the U.S. score dropped as well, thanks to […]
I posit that the Cypriot banks were required by the European Union to hold a certain percentage of their deposits in government bonds, and either by choice or by coercion, made the mistake of purchasing Greek bonds.
I made myself watch the video and I’m glad I did. The interview covered a lot of ground and you made some excellent points. Plus you used two of my favorite words “Due Diligence. The banks who only calculated their fees on the issuance of government debt and the yield chasers who bought it long since stopped doing due diligence on exactly how much debt the decreasing number of Greeks could service.
What happened in Cypress was alluded to but not said. The bankers had to find someone to actually eat the loss, and they settled on unsecured Russian depositors. The banks themselves should have taken the entire loss since they were the ones who went long dodgy Greek bonds, not the depositors.
This was an out and out bank heist by the banks against a politically unpopular group.
I am also fairly certain John Corizone went way long a bunch of bad bonds so that the bankers could get at the clients’ money via the magic known as re-hypothecation.
Zorba if you happen to see this, you should know that I hung my head somewhat sheepishly before hitting post comment.
crisbd asks, Why didn’t the Cyprus government use the same approach as Iceland? The only plausible answer is: because the politicians and bureaucrats were bribed or threatened.
Okay, the Greek Cypriot banks made really bad investment decisions, understood.
But did the Cypriot government bail out the banks as “too large to fail?” Wouldn’t a better answer have been for the taxpayers to reject paying for their banks’ mistakes? Why didn’t the Cyprus government use the same approach as Iceland? The IMF Mission Chief for Iceland says their economy is now growing and they’re doing pretty well for a country whose whole financial system collapsed….
[…] What Really Happened in Cyprus? […]