Will Cyprus issues have any ramifications for Australia?

Chris Caton

Cyprus’s banks are in trouble, in part because they have made a lot of loans in Greece. It thus asked for aid from the Troika (the European Central bank, the International Monetary Fund and the European Commission) to bail out its banking system. As a condition of aid, a plan was hatched to impose a tax on all Cypriot bank deposits.

Cyprus itself simply doesn’t matter. Its GDP (gross domestic product) is 0.03% of global GDP. But deposits of less than €100,000 are guaranteed throughout the euro zone. If it were thought that this could be applied as a remedy elsewhere (e.g. Italy or Spain), then the merest hint of trouble in the future could lead to a bank run, and that’s what has to be avoided at all cost if the euro zone is to survive. Within a week, this plan was replaced by another, which dealt only with the two largest banks in Cyprus and taxed only those deposits above €100,000.

There is no happy ending for Cyprus. By the time it has worked through its problems, its economy is likely to have shrunk by about 20%. In my view, Cyprus will be a one-month wonder, but this episode has raised the risk of a catastrophic ending to the European debt issue. But this risk is still very small. If there is no such ending, Australia will be unaffected.

Chris Caton, chief economist, BT Financial Group


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