If you’ve been following financial headlines, you’ve likely noticed Cyprus as the latest member of the EU to be creating a stir.
To avoid being kicked of out the European Union, Cyprus has agreed to a last minute bailout. The deal will keep the island nation’s banking system alive and avert the total collapse of its economy – but it’s also deeply controversial as the personal savings of its citizens will be taxed in exchange for the bailout. The country agreed to tax bank accounts holding in excess of 100,000 Euros at the country’s second largest bank.
What Led to The Economic Crisis in Cyprus?
The small island with a population of just over one million people is another victim of the U.S. sub prime mortgage crisis, which started in 2007. When the world’s economic woes began Cyprus saw a dramatic drop in tourism and other local business activity. Unemployment in the country has been rising steadily, and earlier this month the country’s debt rating was downgraded to junk. The Cyprus economy has been hit especially hard by the several bailout packages Greece was given in the last few years. It was forced to take a disproportionate haircut on the Greek Sovereign debt they were holding. Cyprus was already surviving on loans from Russia and the Greek crisis has only exacerbated its dire situation.
Why Is Cyprus Important?
The world cares so much about the Cyprus economic crisis because of it strong ties to Greece – an economic collapse in either country would be devastating for the other. That would in turn have dire financial consequences on the E.U., weakened from years of dealing with an ongoing debt crisis.
The aftershocks would also be felt in Canada, as Europe is our second most important trading partner. The total value of bilateral trade between Canada and the E.U. is close to $70 billion. The relationship is so important that an agreement called the Comprehensive Economic and Trade Agreement (CETA) is already in the works to ease trade channels between Canada and the E.U. nations.
An Economy On Hold
The island nation’s banks are closed until March 28. When they reopen the government will impose limits on how much each person can withdraw at one time. As well Cyprus’s Finance Minister says bank accounts holding more than 100,000 Euros could see 40 per cent of the money turned into shares of the country’s largest banks. As banks remain closed the country remains in a standstill as businesses can’t pay salaries, homeowners can’t make mortgage payments and no bills can be paid. This could have a lingering affects after banks open as Cypriots try to catch up on their paperwork.
Could This Happen in Canada?
An incident like this would be unusual in Canada which- as we know- has the strongest banking system in the world. But that doesn’t mean we are immune to it. By providing bailouts to the auto sector and operating with a deficit for several years, Canada remains vulnerable. No body knew the economy would be affected the way it was by the 2008-2009 economic crises, but here we are five years later – worried about the economy of a small island nation. The best advice is to not take advantage of the current financial situation that’s being fueled by quick and cheap loans to stimulate the economy. Operating with some control in spending by individuals and governments will go a long way in protecting Canada from the same fate as Cyprus.