As Cyprus battles to prevent a bank run and keep its people from unleashing their anger at the nation’s bailout other Eurozone members should be looking over their shoulders nervously, particularly the small countries of Malta and Luxembourg.
With all the rhetoric coming from France, Germany and the International Monetary Fund about ‘casino economy’s’ and ‘dysfunctional business models’ the small nations of Europe must be shaking in their boots at what the future might hold for them. This last week the Eurozone and troika have shown what measures they are prepared to take to ensure the Euro doesn’t fail, even if that means taking money from its own citizens to bail out struggling economies.
Christine Lagarde of the IMF wanted both of the major banks in Cyprus, which represented half of the Cypriot banking sector, closed down. Laiki is being closed with its bond and shareholders facing huge losses and €4.2bn (£3.6bn) in deposits looking lost. The Bank of Cyprus will become a shadow of its former self, deposits frozen pending restructuring and downsizing and wealthy depositors facing losses probably of 30%-40%.
The price of staying in the Eurozone is set to be high indeed for the tiny country. Unemployment is expected to soar to 30% in a matter of months and the large number of expats in the country look set to abandon their homes abroad as they look to escape the threat to their savings.
Cyprus’s banking sector was seven times Cypriot gross domestic product, and Lagarde insisted this was unsustainable and that it would be more than halved to around three times GDP by 2018. In a time of embryonic Eurozone bank supervision, with the European Central Bank being made the supervisory authority for all Eurozone banks, the statements from Berlin and Lagarde bore the hallmark of a new policy aimed at taming financial services and getting bloated banking sectors under tight control.
The perfect examples of such an economic model are of course the other smallest Eurozone members, Malta and Luxembourg. Relative to GDP, tiny Malta’s banking sector is even bigger.
Its finance minister sat next to his German and Cypriot counterparts at the first Cyprus bailout meeting in Brussels 10 days ago and was extremely chastened by what he witnessed. After experiencing Wolfgang Schäuble, the German finance minister, up close, he wrote an article in the Malta Times saying God help his country if it encounters similar problems in the Eurozone. Then of course there is Luxembourg, the second smallest member of the Eurozone, but by far the wealthiest. Its own banking sector exceeds its GDP by a massive factor of 23!
The big difference for them however is that the banks in question are not Luxembourg banks, but subsidiaries of the European and US banking giants. In a sign of defiance Jean Asselborn, the Luxembourg foreign minister, warned Berlin on the eve of the Cyprus bailout that it needed to watch its words, that no one was complaining that the German car or arms industries were too big.
The Cyprus bailout could prove to be the event that ultimately brings down the Euro after all how many more nations must go the way of Greece, Portugal, Spain, Italy, Ireland and numerous others before the leaders of Europe rethink their Euro dream?
Current Euro Exchange Rates
As of 15:15 pm
The Euro to Pound Sterling exchange rate is currently trading in the region of 0.8481
The Euro to US Dollar exchange rate is currently trading in the region of 1.2851
The Euro to Australian Dollar exchange rate is currently trading in the region of 1.2265
The Euro to New Zealand Dollar exchange rate is currently trading in the region of 1.5396