Cyprus Updates

I have always enjoyed the posters at despair.com, if you are bored one day i recommend it. When I heard the details of the Cyprus deal I was reminded of the above poster. No real analysis today, just thought that I would collate the views of some of the web’s most respected economic commentators on the likely outcome of the Cyprus deal:

Here is FT Alphaville,

 Cyprus is likely to suffer substantial deleveraging and a severe credit crunch, which will only make the recession worse, in our view.

Tyler Cowan thinks

Output on the island could easily decline by 25% or more, and I don’t think that will involve much subsequent mean-reversion.  There will be a deflationary shock, an uncertainty shock, an “austerity shock,” a credit contraction shock, and a few other negative shocks as well.  The Cypriot government will not be fiscally well situated to support the safety net or automatic stabilizers.

Even The Wall Street Journal, cheerleader for austerity and the confidence fairy reports

“We think the peak-to-trough decline in annual real GDP will be in the order of 23%, similar to Greece, but we see risks more on the downside than the upside,” he says.

Felix Salmon over at Reuters, in an article titled `Cyprus: Its not over yet’ thinks

the hit to Cyprus’s GDP is going to be so enormous that staying in the euro over the long term, absent another round or two of massive debt relief, is going to be extremely difficult.

Paul Krugman says,

 There’s still a real estate bubble to implode, there’s still a huge problem of competitiveness (made worse because one major export industry, banking, has just gone to meet its maker), and the bailout will leave Cyprus with Greek-level sovereign debt.

David Beckworth despairs,

The current Eurozone approach is the equivalent of an economic whack-a-mole game that never truly solves the problem. The Cyprus crisis is just the latest mole to stick up its head.

Also worth a read is the Beckworth post on German Bias in ECB policy.

Matt Yglesias addsto the consensus:

Is Cyprus now saved? Absolutely not. Even if nothing goes wrong, you’re talking about the destruction of the island’s main high-value industry and a huge evaporation of local wealth. The ensuring depression is going to be sufficient to make problems for Cyprus’ remaining banks even if everything else goes fine.

I will let Lars Christensen, Riksbank member, have the last word:

But why do we continue to debate the terms for bailouts in Europe? Because we got monetary policy terribly wrong. Had we instead had proper monetary policy rules in Europe then we would not have these problems.

So, not one of the economics bloggers that I respect/follow think this is anything other than an unmitigated disaster for Cyprus. But don’t worry, its now the template for future rescues. And you know that must be true, since they have rushed to officially deny it