Cyprus – economic and political risk has just increased again

In an excellent article on the Forbes magazine website, Tim Worstall explains perfectly what is so worrying about the Cyprus financial crisis in terms of the wider economic situation.

All depositors in Cypriot banks are being hit with a tax (or a confiscation if you want to look at it like that) of a proportion of their bank deposits. Now, that may or may not be “fair” in terms of who is bearing the cost of bailing out another southern European basket case. It may or may not be a good way of getting at the Russian “gangsters” who, rumour has it, have been depositing large amounts of cash with banks in Cyprus as part of their money laundering activities.

But the problem is that it directly contradicts, as Worstall explains, the deposit guarantees provided to savers by the government of Cyprus. That has previously guaranteed that deposits up to 100,000 Euros were protected, whatever happened to the bank with whom the deposit lay. But now, following the demands of the Troika (the EC, European Central Bank and the International Monetary Fund) that promise has been broken.

So the consequential problem is this. Why should savers in Greece, in Italy, Spain, even France or the UK, believe their governments' similar promises? The same guarantee applies – or in theory applies – in these other countries. But if depositors start to doubt the promises...?

This action in Cyprus has therefore significantly increased the probability of increased lack of confidence in other countries or banks, and the chance of further economic problems. So don't be lulled into a false sense of security, given recent comments around the Euro crisis being over. There could still be a lot more uncertainty and risk ahead, and organisations' risk registers need to reflect this for some time to some, we'd suggest..


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