Angela Merkel’s Cypriot headache

Article Highlights

  • Greece will not have been the last euro member country to require a multiyear bailout program.

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  • German politicians understandably bridle at the prospect that German taxpayer money would be effectively used to bail out Russian oligarch depositors at the Cypriot banks

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  • Merkel will almost certainly want a quick resolution of the Cypriot economic and financial crisis so that bailing out Cyprus does not become a domestic political issue ahead of her reelection bid.

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German Chancellor Merkel will want a quick resolution of the Cypriot economic and financial crisis so that a bailout does not become a domestic political issue ahead of her reelection bid.

One has to pity German Chancellor Angela Merkel. No sooner does she succeed in keeping Greece in the euro, after very protracted negotiations with both the Greeks and the International Monetary Fund (IMF), than another euro member country, Cyprus, rears its ugly head. And it does so with economic and financial problems at least as challenging and as intractable as those in Greece.

Resolution of the Cypriot economic and financial crisis ahead of Germany's September 2013 parliamentary elections will prove to be very difficult for Merkel, since such resolution will almost certainly prove how hollow her assertion has been that official debt reduction in Greece was a special case not to be repeated elsewhere. It will also underline the uncomfortable truth that Greece will not have been the last euro member country to require a multiyear bailout program.

Underlying the present Cypriot economic and financial crisis is a domestic banking sector that was allowed to get totally out of control. Aided by a large inflow of Russian laundered money, the Cypriot banks' balance sheet was allowed to expand to around 8 times the size of the Cypriot economy. To compound matters, a substantial part of the Cypriot banks' balance sheet was loaned either to Greece or to finance a domestic real estate bubble.

The full text of this article is available at The American's website.

 

 

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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