Cyprus Problem

Topics: Euro, European Union, European Central Bank Pages: 3 (1141 words) Published: June 21, 2013
What is the 'Cyprus problem'?
The tiny island has been accused of running a “casino economy”, as the Pierre Moscovici, the French finance minister put it as talks began on Sunday. On the face of it, the critics seem to have a point. The total consolidated assets of the Cypriot banking sector are 7.5 times the size of the island's economy, which produces about £15 billion a year. Its huge financial sector, relative to the real economy, is dominated by three large banks, two of which Laiki and the Bank of Cyprus are on the verge of collapse. As the rest of the European financial sector retrenched, Cypriot banks continued to pay high interest returns for savers. Related Articles

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Cyrpus' leasers are in Brussels for last-ditch talks to save the island from bankruptcy. Moreover, Cyprus is seen in many northern European capitals, especially Berlin, as an offshore banking haven for Russians, where lurid stories of oligarchs and money laundering abound. The conditions for the eurozone-IMF bailout mean Cyprus must more than halve the size of its banking sector by 2018 to match the EU average of around 3.5 times GDP. In 2011 the financial sector accounted for 8.8pc of growth in Cyprus, if it is halved then it is not clear what economic activity will turn up to make up the shortfall in wealth. So is it fair to say the Cypriot financial sector is too big and needs cutting down to size? It’s a new concern.

When Cyprus was getting ready to join the EU in 2003, European Commission reports did not find any problems with its banking sector. Neither did the European Central Bank, which is now threatening to...
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