Is the Cyprus 'Haircut' a Necessary Evil or Proof That the End is Near?


Are we really out of the crisis? Is this situation actually going to come to an end at some point soon? Although the above questions appear to be very much simplistic – ever naive, they are still the focal point of every discussion taking place either in an international or a strictly regional European level. Although the stocks are gradually stabilizing and giving an optimistic look of the future, the fact that bank systems are still collapsing and countries are forced to ask for support from the IMF and the ESM outline that there are still impediments towards the so-called "fiscal reform."

Cyprus is the new victim of the politico-economic game. After hours of negotiations between the IMF, the Eurogroup and the Cypriot Government, a haircut is likely to be imposed in the interest of sustaining the national bank system and it is about to generate drastic alterations to the social and political agenda of the island.

The case of Cyprus is very much special for various reasons deriving from its geopolitical position, its economic structure, its links with non-European funds and of course its inability to find a golden solution between the Greek-Cypriot and the Turkish-Cypriot communities. Additionally, the fact that Cyprus became the first country to which having a haircut for deposits lower than €100.000 was initially thought to be implemented is also an issue that needs to be underscored not only as a false political move but also as an alarming financial event against predetermined and established European rules.

However we cannot overlook the fact that banks in Cyprus followed very hazardous, risky and inevitably unsuccessful policies given that the loans they provided were more than 7 times the national GDP. Moreover, banks were more looking forward to attracting foreign funds rather than have long-term objectives and thinking strategically of how to utilize those funds for further growth. The above cannot be considered irrelevant to the French paper Libération that described Cyprus as a "Casino Economy," or unrelated to which was the exact space that Cypriot business sector wanted to have between the Euro zone and Russia.

The newly appointed government of President Anastasiades had to manage a critical situation along with assessing the importance of the natural gas reserves that were discovered in its wider territory in proportion to what Russia is currently expecting. Although the political authorities are accused of being totally aware of a situation which does not appear to be a bolt out of the blue, the denominator is the same, and is nothing else than a society that is going to suffer drastic cuts in spending, to face economic constraints and to confront unemployment and recession.

The fact that Cyprus completes the puzzle of economic maceration that is formed in the wider Mediterranean area is also an issue that is expected to have domino effects on the social and political realm of the Union given that the whole of the Euro zone is currently in turmoil. Additionally, the ethical hit towards the degraded and significantly wounded idea of a united Europe appears to be a very serious threat to be considered. Although changes are needed, it is high time to see whether they are orienting towards the right direction.