Cost of Cyprus bailout 'rises to 23bn euros'

[Weedlab]

spurgeonryan said:
Why is this country being bailed out? I did not even know it was a country. Is it worth it? That is a lot of money!

 

You’ve never heard of Cyprus? Well, to give  a crude summary .. prior to the crisis of 2008 it was seen as a very healthy economy largely because of high growth levels, sound public finances and low levels of unemployment.

Its banking sector grew rapidly in the ‘good’ times. I think the IMF valued their assets at around 835% of their GDP – that includes loans they made.

Now that you have the context, here comes the problem. Cypriot banks were heavily exposed to the situation in Greece, so they sustained heavy losses from the ‘haircuts’ and other measures that transpired in there. Basically, when Greece was allowed to defalt on some of its debts the banks in Cyprus got into serious trouble. The losses were so large that the Cypriot government couldn’t bail them out personally and that's why the Troika had to step in (the IMF, European Central Bank and European Commission). 

 

Now despite the relatively small size of the economy, many were concerned about that crisis spreading to the wider eurozone area. Contagion (spreading) would be very bad for the eurozone and by extension global markets. Humans and their old herd instinct. That’s one of the reasons why policy makers don’t want it to exit the eurozone area (According to Christine Lagarde from the IMF and Mario Draghi from the European Central Bank). People fear if it is not bailed out or allowed to exit the eurozone it would trigger a loss in confidence in the currency bloc and prompt all sorts of problems, such as investors withdrawing from the other troubled economies (Such as the PIGS .. Portugal, Italy, Greece, Spain)