Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Cyprus' Debt a Long Time Building
The European Union is currently wrestling with the debt problems of Cyprus and the Cypriot banks. In some ways these problems are new. But in many ways they are old. They have been building for decades as Cyprus has lived on borrowed money. Eventually nations that do not save, that live on borrowing, lose credit.
According to Trading Economics (http://www.tradingeconomics.com/cyprus/current-account-to-gdp) from 1995 through 2012 Cyprus averaged a current account deficit of nearly six percent of GDP.
Borrowing that much money over time makes for huge international vulnerabilities. If the problem goes on too long, the choices become stark. Either the lenders do not get repaid, or someone steps in to pay them. Cyprus has, unfortunately, lived beyond its means for a great many years. Unless natural gas in the Eastern Mediterranean or some other source develops quickly to rescue it's balance of payments, the balance of trade will have to move toward balance.
In the context of the Euro Cyprus cannot adjust its currency value, nor can it impose trade restrictions on its major trading partners. Long, painful declines in individual income is the primary available solution. Poor Cyprus.
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