| The Cyprus problem Apr 11th 2013, 10:20 Still continuing, although having dropped out of the news a bit. Cyprus and the euro: http://www.bbc.co.uk/news/business-22002153 Quote:
Cypriot labour costs rose 40% between 1995 and 2008, making it a relatively more expensive place to go on holiday or locate a widget factory, and the main reason why Cyprus has been collectively spending more than it earns.
But as long as it remains in the single currency, Cyprus - like the rest of southern Europe - cannot gain a cheap international price advantage by devaluing its currency.
That puts it at a permanent disadvantage as a holiday destination to nearby Turkey, for example.
Another drawback of being in the euro is that you do not control your own central bank.
Whereas the UK and US governments can rely on their central banks to buy up a lot of their debts through their quantitative easing programmes, the countries in the eurozone face much harder budget constraints.
Cyprus - like all other governments seeking a bailout - has been told to impose spending cuts and tax rises...
...Cyprus does, of course, have some say over its destiny - it could still choose the nuclear option of leaving the euro.
Any expectation that Cyprus would leave would result in bank runs, capital controls and huge losses for depositors. Who wants their deposits forcibly converted into a new Cypriot currency and then devalued?
But, given that Cyprus already faces all the above, some economists are asking why not just go ahead and leave?
At least that way it can enjoy the benefits of devaluing and of regaining a central bank that is able to finance the government directly.
The Cypriot public have seemingly turned against the euro - and the popularity of the single currency is on the wane generally across Europe.
| Selling off the gold reserves: http://www.bbc.co.uk/news/business-22106187 Quote:
Cyprus is to sell off much of its gold reserves to help finance part of its bailout.
An assessment by the European Commission says Cyprus must sell about 400m euros (£341m) worth of gold.
The country has already been forced to wind down one of its largest banks in order to qualify for a 10bn euro lifeline from international lenders.
Even with that bailout, it is predicted that the Cypriot economy will shrink by 8.7% this year.
Cyprus's total bullion reserves stood at 13.9 tonnes at the end of February, according to data from the World Gold Council.
At current prices, 400m euros' worth of gold amounts to about 10.36 tonnes of metal.
The sale will be the biggest bullion sale by a eurozone central bank since France sold 17.4 tonnes in the first half of 2009.
| Meanwhile, the bail-out is still not dealt with: http://www.guardian.co.uk/business/2...-analysis-bill Quote:
Crisis-hit Cyprus will be forced to find an extra €6bn (£5.1bn) to contribute to its own bailout under leaked updated plans for the rescue.
In total, the bill for the bailout has risen to €23bn, from an original estimate of €17bn, less than a month after the deal was agreed – and the entire extra cost will be imposed on Nicosia.
Cyprus's politicians had already faced intense domestic political pressure for agreeing to impose hefty losses on savers at two struggling banks in order to fulfil its eurozone partners' demands of contributing €7bn.
But after a more detailed "debt sustainability analysis" showed that the black hole in the island nation's finances is far deeper than first thought, the total bill for Cypriot taxpayers and depositors has now been set at €13bn. The €23bn overall bill is larger than the size of the Cypriot economy.
The document, leaked on Wednesday night, underlines the botched nature of the initial bailout agreement, which was hurriedly cobbled together in March and had to be redrawn after Europe's finance ministers rejected the idea that depositors holding less than €100,000 – whose savings are meant to be insured – would face deep losses...
...Some analysts also warned that the projections for Cyprus's economy on which the bailout plans are based could prove to be over-optimistic, as has repeatedly been the case in Greece, potentially prompting a fresh bailout.
Cyprus's economy is expected to suffer a deep recession, with GDP contracting by 8.7% in 2013, and 3.9% next year. However, a government spokesman in Nicosia last week suggested the downturn this year could be far deeper, perhaps up to 13%, which could throw the bailout plans off course within months.
And Simon Derrick, chief currency strategist at BNY Mellon, questioned the idea that the economy would recover within two years, recording growth of 1.1% in 2015. "Why would confidence return and make people want to put money into Cyprus?" he said. "The economy is three things – banking, property and tourism. You're not going to rebuild an offshore banking industry in Cyprus; and in tourism it's competing against Turkey, where the currency is down 50% since mid-2005."
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