The ongoing bank crisis in Cyprus reached a fever pitch last week when the government refused the EU-sponsored plan for a bank bailout, and then, Russia also closed any doors Cyprus might have had left. This week began with a complete turnaround, when Cyprus accepted a tentative agreement with Brussels for the outstanding 10 billion euro bailout package from Europe, which includes an agreement by Cyprus to come up with 5,8 billion euros. Further, deposits under 100,000 will be guaranteed, but those over that amount will receive a still undetermined tax rate, although is expected to be in the vicinity of 30% to 40%. The deal might prevent an exit from the Eurozone, but debt dooms Cyprus to a long spell of economic stillness that will not only spread to the rest of Europe, but possibly jump across to North America.
Further in the details of the plan, the country’s second largest bank, Laiki, will be split up along the lines of unserviceable obligations and stable liquidity assets. The biggest bank, Bank of Cyprus, will be restructured, but the particular details on that are yet to appear. In any scenario, however, Russian investors stand to lose the most out of the restructuring deal on Cyprus. President Vladimir Putin threatened to extend the crisis further by demanding the restructuring of a 2,5 billion euro bailout loan provided in 2011. The fact serves to highlight Cyprus’ deeply dire situation.
Regardless of the slightly eased macroeconomic situation, Cyprus will not reopen the banks until this Thursday, March 28. The moratorium goes with an enforced limit on withdrawals to 200 euros a day, all in the effort to prevent a massive capital flight. In this respect, accounts over 100,000 euros also remain frozen and the guarantee of their safety is not certain, unlike smaller deposits.
In greater jeopardy remains Cyprus’ economic recovery, already severely impacted by Greece’s own debt and budget troubles. High unemployment, stagnating growth and an uncertain future, all extended indefinitely by the coming collapse of the banking sector and the outright theft of billions, as Cypriots are faced with a dilemma: to stay or go. Where to, remains an open question, as European countries are already taking steps to tighten immigration controls, as U.K. Prime Minister David Cameron announced new steps in this direction for his country, a trend likely to follow around the continent. Young people remain the most vulnerable, as the prospects of an entire generation might melt away, should the economic difficulties set in for the long term.
For the larger Eurozone, Cyprus becomes the fifth country after Greece, Portugal, Spain and Ireland to line up at the EU’s fiscal soup kitchen. Focused on weak growth and life support against overwhelming debt, the recovery of Europe could take much longer, as debt can easily dominate economic life for the next 5-10 years. That is enough time to forestall plans for targeted investments into economic development and creating jobs for young people, when the world’s economy is gradually moving to its traditional center of gravity in Asia. For Europe, Cyprus is the symptom of a systemic debt illness.
We might talk about the West entering its new Dark Age of stagnating economies and the exasperation of political systems, where European Commission decrees and presidential orders guide political affairs, while representative institutions wrangle and simulate democracy to little more than theatrical effect. This is also how we might describe Washington's reality, as the U.S. faces more or less the same problems as Europe.
It needn't be valid everywhere, however — the last time Europe was in the depths of its own ignorance, China was again the center of the world.