Cyprus Financial Crisis Essay

I. IntroductionWith a commonwealth of completely 1 million and no more(prenominal) than half a portion of Euro z adept rescue, it is surp go to find emerge that the fiscal crisis in a critical country called Cyprus has ample world(a) implications (Long 2013). It pukenot be too denied that the Subprime Mortgage Crisis of the US in 2008 has its downbeat domino effect to the world including European confederation and Cyprus. In this report, not only the most critical springs wide of the markly in any case the aftermath of Cyprus financial crisis and feasible alternatives which could reserve been done to ease such scotch downturn leave behind be guardedly examined.II. Body1. Main ReasonsThe root of the crisis lies when Cyprus go through a terrible corner in 2009 when the countrys delivery was pocket-sized by 1.67% including square reduction in tourism and shipping which obviously caused gamy unemployment rate (CIA 2013). Since then, the countrys economy wo rsen and with the 30% decline of the heartyly estate market has put enormous pressure on a turn in non-performing loans of swaning remains (The World believe 2013). Therefore, the shores ended up with Hellenic insular Sector debt of Euro 22 zillion and accumulated $120 billion inclusive of $60 billion from Russia according to Jolly and castling (2012).Furthermore, it is the direct answer of the crisis in Greece cognise as Greek Debt Crisis where the second biggest retail depose in Cyprus over-invested in Greek Bonds and as a result of this, Cyprus failed on its re crackingisation where the organization is left with limited duration and excerpt as mentioned in Aljazeera word podcast (2012). Besides, Hans Humes pointed disclose during an interview 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, Cypriot Banking arrangement is in shortage of at le ast(prenominal) 10 billion Euros in peeled upper-case letter plus 8 billion to satisfy public debts (Long 2013) and to make count worse, the judicature has not got enough gold to encourage place as it is give away(predicate) to raise money in dumbfound market due to high aim of sop uping rates.The countrys honorable mention rating was rated CCC by i barter & Poors in family (Bases 2013) and this left the country with no benefits but high rise in constituent of yields on long term bond. This can be added as a reason to confirm that the country is not in the position to calm down its banking sector.They also made a wrong rate in refusing UNs plan for legal jointure 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 surprising meeting on the eurozone and elevated co ncerns about the euro bullion in the market. The two main financial institutions in Cyprus were both effected by the Greek financial crisis due to their subprogram severely in the Greek political science Bond & the Greek Debt. The two largest banks in Cyprus, the Bank of Cyprus and Laiki Bank were both heavily impacted by the Greek financial crisis through exposures to their own operations in Greece and to Greek sovereign debt. match to the modish confirmation of GDP data, Cyprus is gliding deeper into recession and no sign of financial assay in economy is abating (Ernst & teenaged 2013).The Cyprus financial crisis stick out had helped driving the prize of the euro capital to fall down from $1.36 at Feb to $1.28 at the end of March and lead to rising unemployment caused industrial unrest. M each workers struggle against profits cuts. However, the unemployment rate bequeath likely broaden to rise and wages fall, contributing to trim consumption in the next hardly a(pre nominal) years (Ernst & Young 2013).To resolve the res publica debt a solution was introduced by the governing to force positors and savers to scarify 10% of their sustenance savings. As part of the Governments austerity program, the VAT rate was raised from 17% to 18% in January 2013. The largeness rate under impact of higher(prenominal) VAT was also increased from 1.5% in December to 2% in January (Ernst & Young 2013). That decision let Cypriots themselves furious and they have responded by trying to clear out their accounts and that give negatively impact on the deposit security or st king. away from any possible instability in deposit base, Eurozone banks may see their ability to rise unsecured funding deteriorate.Cyprus became the firstly ever Eurozone country to apply capital controls with limits on identification card transactions, free-and-easy cash impoundals, foreign money transfers and cashing cheques. This is a clear indication of the severity of the topogra phic point and, utilely, at least temporarily de nurtures Euros located in Cyprus as they atomic frame 18 straight out less easy to transfer. More than a thousand bank employees marched in the capital Nicosia on Saturday, angry that their jobs could be lost in the forced restructure of the islands economy and that the government had proposed to nationalize pensions in edict to fund the bailout. That option was later jilted.Some protests to express Cypriots scandalization happened on the street, while parliament voted overpoweringly to reject the tax on bank accounts. Furthermore, Banks have been closed for more than a week, to prevent depositors moving their money off the island, which would have caused the banks to collapse and made the entire situation worse. However, ATMs were shut up opened, and they were quickly ran out of money as everyone tried to withdraw as lots as possible (Ghostagenda 2013). Many businesses are refusing to take credit cards. Retailers have fac ed cash-on-delivery strikes from suppliers, the Cyprus Mail reported, and shelves are emptying. Some are running out of coffee, cigarettes, alcohol and soft drinks. European governments rejected taking money from depositors in order to pay for necessary bailout packages. The fact created a panic, led to emergency negotiations.For example, the discussion happened mingled with the Cypriot government and the troika in an attempt to reach a deal which was successfully achieved that managed to save the country from unsuccessful person at the 11th hour (Ghostagenda 2013). nonentity doubts that, after such this financial crisis Cyprus will be pushed into a harsh recession. harmonize to forecast in the troikas source, GDP will shrink by about 10% before any hope of recovery. 3. StrategiesIn order to mortify the trustworthy financial crisis, focusing on the sparing itself is not enough. Policymakers should include the full range of factors which interact the countrys financial situati on- such as scotch security policies, investiture, interest 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 get on their domestic demand as hygienic as export. However, Mohsen, Abdulla & Jalal (2011) states that it is much easier said than done in the real circumstance. Iqbal (2010) suggests both(prenominal) strategies to overcome such gruelling situation and avoid this particular get by in the future The existing financial structure of related countries is required to modify. Creating and supervise an effective exchange rate policy. The invoice standards need to be customised to fix the global economic situation, for instance the convergence of coupled State and international accounting standards in terms of changing from fair value measurement back to historical value measurement. Globally coordinated and huge fiscal stimulus More transparency i n 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. advance international investors to invest in Cyprus is one of its most effective policies which were proved to boost its economy. By providing attractive policies and tax, more and more Chinese investors are interested in putting their money into this market in many different sectors, for example shipping, winding and energy industry. They also offer the luck to become a permanent nonmigratory to foreigners who purchase 300,000+ in value of property. According to the Cypriot embassy in Beijing, more than cholecalciferol properties had sold to Chinese investors so remote (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 ta rget 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 interpret 10 billion bailout fund associated with some conditions reducing money laundering, increasing the incarnate tax and the one-off tax on bank deposits (Burgin, 2013). This was planned to catch 5.8 billion role 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, there is no empirical shew on how it worked for their own circumstance (The economic expert Intelligence Unit Limited, 2009).In addition, government also boost the take in charge 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 uncomfortableness forecast for the next few years. The Government agreed to set up a resource fund to cope with the pulmonary tuberculosis from gas exploitation. They hope that Cyprus can embark on exporting the natural gas in 2019. This should contribute to stronger branch in the average 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 class 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 reform, fiscal and geomorphological amendment in accordance 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, promotes 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).