Cyprus Financial Crisis Essay

I. IntroductionWith a population of only 1 million and no more than half a percent of Euro zone economy, it is impress to find out that the financial crisis in a tiny domain called Cyprus has enormous global implications (Long 2013). It cannot be also denied that the Subprime Mortgage Crisis of the US in 2008 has its downbeat eye mask effect to the world including European kernel and Cyprus. In this report, not only the most critical reasons but also the af limitath of Cyprus financial crisis and thinkable alternatives which could crap been done to ease such economic downturn will be carefully examined.II. Body1. Main ReasonsThe root of the crisis lies when Cyprus experienced a terrible deferral in 2009 when the farmings economy was diminished by 1.67% including significant reduction in tourism and shipping which obviously caused senior high school unemployment rate (CIA 2013). Since then, the countrys economy worsen and with the 30% decline of the realistic estate market h as put enormous pressure on a rise in non-performing loans of banking system (The World Bank 2013). Therefore, the banks ended up with Greek Private Sector debt of Euro 22 billion and accumulated $120 billion inclusive of $60 billion from Russia according to Jolly and Castle (2012).Furthermore, it is the direct result of the crisis in Greece known as Greek Debt Crisis where the second biggest retail bank in Cyprus over-invested in Greek Bonds and as a result of this, Cyprus failed on its recapitalisation where the Government is left with limited time and option as mentioned in Aljazeera news podcast (2012). Besides, Hans Humes pointed out during an query conducted on 21 February 2012 that one of the significant reasons that led to a threat in collapse of the Cyprus Banks is 50% haircut in 2011 during Greek Crisis. Next, prostitute Banking system is in shortage of at least 10 billion Euros in new capital plus 8 billion to satisfy public debts (Long 2013) and to make emergence wors e, the government has not got enough money to help out as it is impossible to raise money in bond market due to high level of suck ining rates.The countrys credit rating was rated CCC by Standard & Poors in September (Bases 2013) and this left the country with no benefits but high rise in percentage of yields on long term bond. This can be added as a reason to keep going that the country is not in the position to calm down its banking sector.They also made a wrong step in refusing UNs plan for labor union their island which clearly annoyed their E.U partners and caused weak strategic position (Dixon 2013).The countrys economy could be a lot healthier if it had restructured the banks.2. ConsequencesThe consequences of the Cyprus financial crisis has had a move impact on the eurozone and raised concerns about the euro currency in the market. The two main financial institutions in Cyprus were both effected by the Greek financial crisis due to their operation heavily in the Greek Go vernment Bond & the Greek Debt. The two largest banks in Cyprus, the Bank of Cyprus and Laiki Bank were both heavily squeeze by the Greek financial crisis through exposures to their own operations in Greece and to Greek sovereign debt. According to the latest confirmation of GDP data, Cyprus is gliding deeper into turning point and no sign of financial stress in economy is abating (Ernst & Young 2013).The Cyprus financial crisis have had helped driving the value of the euro currency to fall down from $1.36 at Feb to $1.28 at the end of March and lead to rising unemployment caused industrial unrest. Many workers struggle against wage cuts. However, the unemployment rate will likely continue to rise and requital fall, contributing to reduced consumption in the next few years (Ernst & Young 2013).To resolve the nation debt a solution was introduced by the government to effectiveness depositors and savers to scarify 10% of their life savings. As part of the Governments austerity pro gram, the VAT rate was raised from 17% to 18% in January 2013. The pretentiousness rate under impact of higher VAT was also increased from 1.5% in December to 2% in January (Ernst & Young 2013). That decision let Cypriots themselves gaga and they have responded by trying to clear out their accounts and that will negatively impact on the deposit security or stability. Apart from any possible instability in deposit base, Eurozone banks may see their ability to rise unsecured neckclothing deteriorate.Cyprus became the first ever Eurozone country to apply capital controls with limits on credit card transactions, daily cash pullals, foreign money transfers and cashing cheques. This is a clear indication of the severity of the situation and, effectively, at least temporarily devalues Euros placed in Cyprus as they are now less easy to transfer. More than a thousand bank employees marched in the capital Nicosia on Saturday, hot under the collar(predicate) that their jobs could be los t in the forced restructure of the islands economy and that the government had proposed to nationalise pensions in order to fund the bailout. That option was later rejected. nigh protests to express Cypriots indignation happened on the street, while parliament voted overwhelmingly to reject the tax on bank accounts. Furthermore, Banks have been closed for more than a week, to keep on depositors moving their money off the island, which would have caused the banks to collapse and made the entire situation worse. However, ATMs were still opened, and they were quickly ran out of money as everyone tried to withdraw as much as possible (Ghostagenda 2013). Many businesses are refusing to take credit cards. Retailers have faced cash-on-delivery demands from suppliers, the Cyprus Mail reported, and shelves are emptying. Some are racecourse out of coffee, cigarettes, alcohol and soft drinks. European governments rejected taking money from depositors in order to pay for necessary bailout pa ckages. The fact created a panic, led to hand brake negotiations.For example, the discussion happened between the Cypriot government and the troika in an attempt to reach a deal which was successfully achieved that managed to save the country from bankruptcy at the 11th hour (Ghostagenda 2013). Nobody doubts that, after such this financial crisis Cyprus will be pushed into a harsh recession. According to forecast in the troikas source, GDP will shrink by about 10% before any hope of recovery. 3. StrategiesIn order to overcome the current financial crisis, pore on the economic itself is not enough. Policymakers should include the full range of components which interact the countrys financial situation- such as economic security policies, investment, fire rate, inflation, employment, etc. (The Star, 2009). In general, developed countries need to save their incomes more and consume less developing countries, in contrast, have to boost their domestic demand as well as export. However , Mohsen, Abdulla & Jalal (2011) states that it is much easier said than done in the real circumstance. Iqbal (2010) suggests some strategies to overcome such difficult situation and avoid this particular fill out in the approaching The existing financial structure of related countries is required to modify. Creating and monitoring an effective exchange rate policy. The accounting standards need to be customised to engage the global economic situation, for instance the convergence of United State and international accounting standards in terms of changing from fair value measurement prickle to historical value measurement. Globally coordinated and huge fiscal stimulus More transparency in the operation of financial institutions.Application in real situation of CyprusThe Cypruss banking system has done a huge number of works in order to reduce the impact of financial crisis on its economy. back up international investors to invest in Cyprus is one of its most effective policies w hich were proved to boost its economy. By providing attractive policies and tax, more and more Chinese investors are raise in putting their money into this market in many different sectors, for example shipping, construction and energy industry. They also offer the opportunity to become a permanent resident to foreigners who purchase 300,000+ in value of property. According to the Cypriot embassy in Beijing, more than 500 properties had sold to Chinese investors so far (Shengnan, 2013).Cypriot government is also seeking the financial assistance to solve their current debt crisis, primarily happened as a result of over-invested in Greek banks. European Union (EU) is a main target which Cyprus considers as its assistance for such an issue. On 25/3/2013, Greek-Cyprus government and EU singed a commitment which stated that EU would provide 10 billion bailout fund associated with some conditions reducing money laundering, increasing the corporate tax and the one-off tax on bank deposit s (Burgin, 2013). This was planned to suck 5.8 billion contribution for the bailout packages from internal resources.The Cypriot government has also declaredspecial fiscal measures with the aim of improvement the investment into their main industries such as tourism and construction. However, in that respect is no empirical evidence on how it worked for their own circumstance (The Economist Intelligence Unit Limited, 2009).In addition, government also boost the guarantee on deposit to 100,000. This action encourages foreign investors to deposit in Cyprus banks as the EU guarantee was only 50,000 (7/10/2008).Furthermore, the It is estimated that Gas revenues will be an important factor in solving Cypruss the economic malaise forecast for the next few years. The Government agreed to set up a resource fund to cope with the expenditure from gas exploitation. They hope that Cyprus can start exporting the natural gas in 2019. This should contribute to stronger harvest-feast in the medi um term (Ernst & Young 2013).III. ConclusionTo conclude, this is a difficult stage for Cyprus. There is still some argument on how will affect government debt sustainability when this country borrow under the economic adjustment programme and how the government debt burden can be reduce from the income of natural gas exploration and exploitation. However, the agreement was reached with the troika is a significant step in restoring the countrys economy. Everyone has shown understanding, consensus, readiness and elasticity to adopt a programme of financial tidy up, fiscal and structural amendment in harmony with the needs of the country.In the future, it is estimate that the Cyprus economy as well as its financial sector will overcome the current crisis and become stronger than before. The economic reform program is seen as an effective way to strengthen and stabilize the macro economy and the domestic financial. It also contributes to the revival of private economic activity, promo tes economic growth and creates more jobs for labors. Moreover, in longer term, Cyprus may have good prospects for growth in the shape of its offshore gas reserves, which could help lower the debt burden of future generations (Central bank 2013).