Should you worry about Cyprus?

The small Mediterranean country of Cyprus has been in the news recently – and not in a good way.  The country has had a banking crisis, which caused the European Union to step in with a loan but also led to some stringent economic measures. Should those of us in the United States be concerned about their problems? N.C. State University economist Mike Walden responds.

“People are saying, ‘Cyprus? Why should I worry about Cyprus? It’s a tiny country.’ And it is. … Here’s the deal. This is really a Greece, part 2. Cyprus has had a very extensive banking system. It’s gotten into trouble. They’ve had some bad loans – a lot of them with Greece – and they had a system where their banks were going to falter. Their banks were essentially going to say, ‘Hey, we can’t pay depositors their money.’  So they had a banking crisis very similar to what Greece had.

“The European Union … did step in. Cyprus incidentally is on the Euro. (The) European Union did step in and say, ‘Alright, we’re going to give you some loans to keep some of your banks afloat. We’re actually going to close some of the banks that are really having the worst problems, but we’re also going to make sure that investors in your banks – and these are investors who do not have insured deposits – take a big hit.’ And they are. Cyprus is likely going to go into a recession if not a depression because of this.

“So, why should we worry? Well, for Cyprus itself, this is not a big issue economically, because it’s such a tiny country, but the problem is, what does this say about the Euro? That’s the big concern. The Euro serves about 400 million people in the world. And so people are looking to this and saying, ‘Well, the Euro survived. Will what the European Unionists do to support Cyprus mean it supports the Euro?’ If not, their people are going to be concerned about the Euro’s stability. They’ll start making runs on banks in countries that really are much larger – like Italy and Spain, maybe even France and Germany. That could be the problem down the road.

“We’ll have to wait and see if the measures the European Union has done will stop the bleeding, but this the big concern.”