Cyprus bail-out vote stirs fresh jitters as slump fears grow in Europe

Cyprus has stunned EU officials by ordering a vote in its parliament on the terms of the EU-IMF Troika bailout for the country, risking a rejection by angry lawmakers and a fresh eruption of the crisis.

Attorney general Petros Clerides said the assembly must have a say on the accord, which will inflict huge losses on depositors at Laika and Bank of Cyprus. The Orthodox Church of Cyprus expects to lose €100m, crippling its charities.

haphaestus: With any luck, Cyprus will be the first of the dominos to fall.  So fitting, that David should bring down Goliath, that the last becomes the first.

clive369: I understand the analogy but are they the first to fall or are they the first to shake off the shackles? I see a bright future for the Cypriots if they reject the Euro. The Euro, as we know it, is dead.

Titus__Pullo: A "bright future"? Really? If they can't get a bailout, they'll default and the government will be bankrupt. They won't be able to pay their doctors, teachers, dustbin men in anything other than worthless money. Mass redundancies will likely follow as the basics they need to import to keep their country functioning will be unaffordable. Public services will break down. Whatever industry they have beyond that which can function in other currencies will be devastated. If they leave the Euro then whatever pieces of paper they replace the Euro with will be valueless and they'll immediately have hyperinflation on their hands wiping out the savings and pensions of every single Cypriot. They'll also be locked out of the bond market for years so raising funds for investment will be next to impossible. A "bright future"? I'm no fan of Europe or the Euro but don't be ridiculous. Whether they stay in or get out of the Euro their future is horrendeous. And arguments about "regaining their democracy" will soon feel pretty hollow to them when unemployment rockets and their savings are worthless.

ceekay: Actually they'll default on their Euro bonds to their German, French & Italian (& British) investors, issue a new currency. This will be used to pay people and other investors (China, Japan etc) will probably be interested in investing in a country with growth prospects, with at least one strong sector, tourism. They will pay more for their loans in percentage terms but much,much less now they don't have to pay of their onerous Euro debts. It'll be tough but life and government is. Good luck Cyprus.

richardvine: Not forgetting of course that they have gas reserves that can be used as collateral for their currency.  If they bail out now they'll also have some gold reserves.

williamwinston: With a bailout they will default eventually but from a worse position. A government with a sovereign currency cannot go bankrupt in the same way as an individual.  Ie, be forced by a court to hand over all of its assets and income in future years. They will be able to pay their doctors, teachers, dustbin men in a new sovereign currency. Whether it inflates depends entirely on the volume created compared to the real value of the GDP.  A near equivalent in our history is Golden Wednesday, when we quit the EMS and reverted to a free currency, creating a sustained period of economic growth and prosperity.  Employment increased; as did imports and exports of vital goods. The bond market shrewdly looks forward and realises that bonds denominated in New Cypriot pounds are unaffected by the Euro default.  So raising funds for investment will be straightforward. The Cypriot future is not horrendous, but it is far worse than had they kept their sovereign currency at the outset of the Euro Democracy, oh that foolish idea; what is democracy worth?  Rather more to me than to you?

Titus__Pullo: I agree they'll default. As will Spain, Italy and Portugal eventually. None of these countries can avoid the economic gravity of gigantic debt, deficits and no growth. Of course sovereigns can't go bankrupt in an individual sense but they can be bankrupt in all but name. No-one would say Zimbabwe was solvent even though as a sovereign nation it has control of its currency. It is a certainty Cyprus will have hyperinflation. Would you want to be holding tangible goods/assets or a wheelbarrow full of a fiat currency from a government that's just defaulted? The "Golden Wednesday" comparison is erroneous. The UK didn't default on "Golden Wednesday". In essence Sterling was devalued by slashing interest rates and letting the currency revert to its "real" level. Two completely different things. Devaluing a currency nearly always exports a country's economic problems to its trading partners. I know its a very trendy thing to do with the USA and Japan amongst others going crazy to devalue via QE but the kind of devaluation Cyprus would face would not be a benign shot in the arm that'll get things moving again. If you were exporting to Cyprus would you feel all warm and fuzzy about accepting their fiat currency as payment? Democracy? You have a choice in the UK? Democracy is dead my friend. There's was a coup back in 2008 and you report to the banking elite these days and whatever the colour of the rosette your preferred tax collector wears makes no difference. Blood needs to flow before your vote means anything again and you get a bit of democracy back.

dbartle: Incorrect, they can trade in US$, as do many countries where the domestic currency is not globalised or liquid. Starting point might be not selling their £400m of gold.

Titus__Pullo: They could but they won't. You end up using USDs as your currency once you've completed the process of Zimbabwefication by printing billions and trillions of worthless papernotes. You can have all the gold in the world in your bank but if you've defaulted on your debts it isn't going to inspire a huge degree of confidence. And their gold is almost certainly not physically in Cypus. It's probably sitting in New York, London or Paris which is not the strongest of bargaining positions to be in if you owe these  countries money. Why do you think Germany wants all it's gold back from the USA?

dbartle: To create and issue an LC it is converted into the currency required if the domestic funds can support it. Point being the receiver gets payment in a global currency of a stable nature, not Cypriot Pounds which may not be easily transferable outside of Cyprus.

Titus__Pullo: If/(when) Cyprus leaves the Euro it is in for a very tough economic time. The point I have made several times on this thread now is it is not going to be a matter of devaluing and expecting hoards of tourists to flock in for cheap holidays before the good times roll again. I don't imagine for second that Cyprus manufactures cars, televisions, hospital equipment, manufacturing equipment (parts & spares) and a whole host of other things that will become very expensive because they'll need to import them. Exiting the Euro will cripple many small businesses and shops and lead to very much higher unemployment. They don't want to stay in the Euro and the perpetual financial serfdom for the fun of it. They've looked at the alternative and it's even worse. But ultimately they're probably not going to have much choice in what happens to themselves.

richardvine: I am afraid that I cannot agree.  They can swap €1 for exactly 1 Cyprus Pound.  The official exchange rate being 1 : 1. They default on all their debts and then do everything to attract foreign money and tourism.  Raise interest rates to encourage people to leave their money in banks.  Slash hotel rates, cut the cost of booze etc etc.  They can appoint an independent IMF governor to the Bank of Cyprus to lend it credibility. There will be an initial devaluation of probably 30% but businesses within the country will survive.  Doctors will be paid the same salaries but in CPs.  Inflation will take off in imported goods but the lack of debt interest payments will enable taxes to be slashed.  Property prices will plummet but everything has its price and within a very short space of time the new floor will be found.  Cyprus returns to be a self governing country and can look to future with confidence. The current alternative is an economy that shrinks by at least 15% this year and probably will enter a deflationary spiral that it cannot escape.  It will have no hope of attracting any foreign investment or tourism because its exchange rate is uncompetitive and nobody will have confidence that they won't eventually default in any case. They can take the pain now and start immediately on the road to recovery or they can endure ten years of hardship with no real prospect of salvation.  I know which I would choose.

Titus__Pullo: You don't "attract foreign money" by defaulting on your loans. The opposite tends to be the case. Investors run for the hills and it take years to rehabilitate yourself and only then through nose-bleed inducing interest rates. Their entire savings and pensions are about to wiped out. Mass unemployment will follow. Many businesses will fail. Doctors and other professionals will emigrate. The economy will be hollowed out. Anything else is wishful thinking. Why on earth if your summary was in any way accurate would they not jump at the chance but have, up till now, wanted to remain in the Euro? The answer is simple: being in the Euro, at least in the short term, is less awful. But on one thing I do agree with you: I think they should grasp the nettle now. It is an evident truism to me that you can't beggar yourself through austerity back to economic growth and prosperity.

bobbass: With a bit of luck… A New, Old World, with its array of different currencies and  ways of life. And border controls! And, all with their own Governments!

boudicca: Nigel Farage socks it to Ollie Rehn in the EU Parliament. "The EU is the new Communism." http://www.youtube.com/watch?v=3RjUJy7kDOM

oldsteph: "…Cyprus has stunned EU officials by ordering a vote…" HOW DARE THEY? Do they think they are in a democracy?

Smell Da Quoffee: Did you mean demoncrazy ? 

Terry: Democracy is the antithesis of Western 'liberal' dictatorship.  It's democratism OR Western 'liberal' dictatorship. No wonder Western 'liberal' dictators and dictatorships are stunned when they see even the faintest glimmer of democratism.  For them democracy is the enemy.   They hate it. This vote will, if it is held, deal a mortal blow to Western 'liberal' dictatorships and dictators.  Watch them conspire against it. Go Cyprus!

Schadenfreuden: This vote in Cyprus and Obama getting his nose rubbed in the dirt in America a few days on on the gun vote makes me feel really good.

avataruk: R.I.P. EU/EMU! I suppose all good things have to come to an end, sometime! Yippee!

ernie: Calm down dear. If they vote the wrong way then Brussels will make them do it again until they get it right, just ask the Irish.

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