April 08, 2013
Cyprus is edging towards euro exit. Cyprus is no longer center stage. Nicosia has agreed a 10 billion euro bailout deal with its euro zone partners and the International Monetary Fund. A visible bank run has been averted by stringent capital controls. International markets, which only ever suffered a mild bout of jitters, have calmed down. But it would be foolish to forget about Cyprus. The small Mediterranean island is edging towards euro exit. Quitting the single currency would devastate wealth, fuel inflation, lead to default and leave Cyprus friendless in a troubled neighborhood. Even so, the longer capital controls continue, the louder the voices calling for bringing back the Cyprus pound will grow. President Nicos Anastasiades is against Cyprus leaving the euro. But the main opposition communist party wants to pull out. A smaller opposition group wants to stay in the euro but kick out the troika – the European Commission, the European Central Bank and the IMF. The country’s influential archbishop is also critical of the troika. Anastasiades can hold the line for now. After all, he has just been elected and the constitution gives him huge power. What’s more, there are strong arguments for staying inside the single currency – not least the fact that, otherwise, it would lose the 10 billion euros (or nearly 60 percent of GDP) of bailout money. If Nicosia brought back the Cyprus pound, it would plummet in value. Nobody knows how much, but economists guess it might be up to 50 percent. Cypriots are complaining at the massive haircuts suffered by big depositors in their two largest banks: Bank of Cyprus and Laiki. Such a massive devaluation would savage the wealth of all other depositors.
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