European Debt Crisis

No tax, no bailout? A worst case scenario for Cyprus

Stephen Beard Mar 20, 2013
HTML EMBED:
COPY
European Debt Crisis

No tax, no bailout? A worst case scenario for Cyprus

Stephen Beard Mar 20, 2013
HTML EMBED:
COPY

Cyprus is in turmoil following the decision last night by its parliament to reject a bailout plan from the eurozone. The plan entailed a one-off tax of up to 10 percent on Cypriot bank accounts. But should the rest of the world worry about what’s happening on a tiny island nation in the middle of the  Mediterranean?

Yes, perhaps. 

Here’s the worst case scenario: Cyprus continues to reject the bailout deal. Its banks go bust. The country is forced out of the eurozone. Hedge funds speculate on which euro country will be next to head for the exit. There are bank runs across the continent, and mayhem in global markets.

Some observers say that this possibility makes it all the more remarkable that the Europeans — and the Germans in particular — refuse to pump that little extra bit of cash into the small island economy.

“It’s just ridiculous that they wouldn’t. That they threaten bank runs across Europe,” says analyst Louise Cooper. “They threaten contagion, for 7 billion. It’s ridiculous but the reason they’ve done it is because it’s German election year.”

The German government fears that if they cut a special deal for Cyprus, much bigger euro countries like Spain and Italy will be lining up for extra assistance. And that would be exceedingly unpopular with German voters. 

So far financial markets are taking the Cypriot fiasco in stride. They seem to believe that Europe cannot afford to let  Cyprus sink, or that the Russians will ride to the rescue — but that eerie calm in markets may not last. 

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.