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28 March 2013

Crisis In Cyprus - Part 3

Agreement between the Eurogroup and Cyprus in regards to the bail-out/in has been achieved. The terms were much more sensible than first discussed, and represents a seemingly responsible position for the Eurogroup. Seemingly, because while they have taken a correct position towards Cyprus, fundemental problems with the Euro have (still) not been addressed.

Cyprus, on the other hand, is doomed to disaster. They are encountering the perfect storm of both supply-side and demand-side crises. Their banking industry is decimated and it is estimated will be cut in half, resulting in massive layoffs. They are of course, unable to devalue their currency to stimulate the other majority sector, tourism.

Cyprus, like Greece before it, will slip into severe recession, possible depression. Over the next year or two, it will become more obvious that their best option would have been to exit the Eurogroup, take the severe devaluation, adjust the Cypriot pound, and immediately begin the process of recovery.

But having accepted the Eurogroup's bail-out, and still being saddled with the Euro, there will be a long, long period of austerity. The capital controls put in place were initially supposed to last a week. Now it has been announced they will be in place a month. In reality. the controls will be in place until there is political change. Being a democratic country, the people will grow weary of the austerity, and vote themselves into power a government that promises to reject the EU's demands. Then they will end up in the same place they find themselves today. The only viable choice it to dump the Euro.