Lesson from Cyprus

If, just a few years ago, someone had prophesied the current economic state of affairs, nobody would have believed them. It would have been unbelievable that an economic crisis could arise whereby a country would be forced to close its banks for over a week, ATM machines would run out of cash, and depositors would be obliged to pay a very high rate of tax in order to rescue the economy. However, it seems that the twenty-first century has brought with it unpredictable events. The collapse of giant financial corporations, and the subsequent deep recession experienced by major industrial states, have served to remind everybody that in the world of finance, nothing is without risk. Indeed everything carries with it a certain risk. The painful agreement was reached at the eleventh hour, or shall we say at the last possible moment, before the EU cut the last lifeline to the island that was forced to shut one of its large but troubled banks. Reports indicate that a 40 percent tax will be levied on deposits in Cyprus, with deposits exceeding EUR 100,000 to be taxed at an even higher rate. Cyprus is paying an exorbitant price, the impact of which will continue to be felt over the next five to ten years. This is not mentioning the job cuts that will have to be enforced in the hopes of avoiding possible bankruptcy. The consequences of this could even reach the EU itself, particularly as some of the EU’s southern states have faced unprecedented financial trouble over the past two years. This includes major industrial states such as Italy, which are facing unprecedented financial troubles. These countries have been forced to take unpopular austerity measures that have incited protests that are still ongoing today, particularly in countries like Spin and Greece. Cyprus could be taken as a classic case of an economic crisis that arises from an environment of rapid growth combined with an abandonment of banking rules and regulations with the objective of attracting foreign capital, particularly Russian depositors. These banks offered higher interest rates, particularly when compared to other EU states. Another advantage was that these bank accounts were considered to be safer, particularly as Cyprus is an EU member state. However Cyprus was not the only country to do this. Many other economies resorted to a similar approach in search of investment, although they were well aware that high interest rates mean that the return on this capital must be even higher in order to pay back depositors and still make a profit. While such practices can work in times of prosperity and growth, they can be fatal during periods of economic crisis and decline. Iceland experienced a similar crisis years ago; Icelandic banks were attracting depositors from other European states by offering high interest rates. However these depositors realized that their cash was unsafe, and, thus, Iceland’s overseas assets were frozen in order to cover these deposits. So, can the Arab nations learn anything from the Cypriot crisis? Certainly, there are lessons to be learned. An Arab version of the Cyprus crisis is not out of the question. Half of the Arab world is at risk of more than the threat of bankruptcy today, particularly following the political turmoil that has swept through the region and which also affected their economies. Some of these unwise banking practices and irrational expansionist policies can now be found in the Arab world. The most important lesson is to follow the correct rules. Caution over the future must be observed by adopting international safety regulations. We must also limit unwise expansion in terms of spending and consumption. When such measures are correctly applied, our economies will be stabilized, and become resistant to any detrimental changes bought about via foreign markets. Indeed, the reality of modern economics is that all states are interconnected and affect one another, for better or worse. We must also note the tough negotiation conducted by the major EU states—particularly Germany—and the IMF, with the Cypriot government. They put together an agreement stipulating that the government will bear part of the financial burden, otherwise threatening to cut-off financial assistance to the island. The international mood has changed following a series of crises that arose as a result of expansionary fiscal policies. We are now facing a situation in which nobody wants to offer funding but must do so under political pressure. In the case of Cyprus, this involves exiting the EU, which would be the first move of its kind. The most important thing to bear in mind is that the world is today experiencing an economic crisis that has no parallel over the past few decades. Estimates indicate that this is not part of a regular recessionary cycle, which concludes within one or two years. However due to the lack of financial liquidity and loans—which were readily available in times of growth and prosperity—this current economic crisis may last until the end of the decade. This means that it will be very difficult for stalled or stalling Arab countries to restart their economies and get out of danger. Even if the necessary financing can be secured, the terms and conditions for this will be similarly harsh and unpopular; accepting them would require a strong political will. --- The views expressed by the author do not necessarily represent or reflect the editorial policy of Arabstoday.