Dominoes of Debt

April 12, 2012

While the debt crisis in the Euro Zone focuses on Greece, the UK, and Ireland, many other countries struggle to maintain their heads above water. Cyprus, a small island nation with a population of 1,138,071 and a GDP of $23.77 billion dollars, is facing its first hard impacting recession since a civil war in 1974. The country’s economy is almost entirely comprised of financial services. Its banks represent risk in loans or other money totaling €152 billion (today that’s about $200 billion or 8 times the national gross domestic product), but the country may need a bailout from the Euro Zone soon if new capital is not found. The situation is tricky, and it could have been avoided.

The country of Cyprus has a very low corporate tax rate and few individual taxes, making it a perfect place for large corporations in the Euro Zone, Russia, even the Middle East, to bank and perform accounting services. As a result Cyprus saw huge gains in business after the 1974 war. One sociologist commented, “You could come off the plane and get a job,” regarding the low 4% unemployment rate in the country. Today, the country is struggling with a 10% unemployment rate, pressure from the Euro Zone to accept bailouts to avoid a default, and debt once making Cyprus banks money in interest, has cost them over €3.5 billion.

In Cyprus the struggle to avert a situation like Greece is paramount to the economy. Should the country be forced to accept bailouts from the Euro Zone, tough austerity measures and reforms to their tax code could harm the economic model they have established centering on financial services. And, it all started with Greece.

Once bad debt from Greece put the banks into financial struggle, the whole country’s economy suffered. The disturbing part of this scenario is the scale. Greece’s situation, while completely avoidable, would pale in comparison to the same situation occurring in the US. The reason being the amount of debt dispersed would, like it is in Cyprus, drag economies to a standstill.

Washington cannot afford to keep spending without consequences. Just ask Greece and Cyprus.

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