[T]he "terrible swift sword" of the Gods of the Copybook Headings is a two-edged sword. It is not only slashing the savings of investors, it is also slashing away at Cypriot employment:
- Cyprus used to be an international center for banking. The jobs serving foreign depositors died when Cyprus confiscated 37.5% of deposits exceeding 100,000 euros by converting them into nearly worthless bank equity.
- Many of Cyprus' businesses are now going bankrupt due to a cash crunch. Not only did they lose 37.5% of their bank deposits of over 100,000 euros, but now they only have limited access to their remaining funds.
- Cyprus's biggest employer, the government, has kept its wages and employment high. But in return for the low interest 10 billion euro loan that will keep it solvent, the Cypriot government will have to move its budget toward balance.
Meanwhile, Cyprus' underlying problem, its huge trade deficit, is not being addressed. From 1995 through 2012 Cyprus averaged a current account deficit (trade deficit) of nearly six percent of GDP. Borrowing that much money from abroad to buy imports 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. In Cyprus, the lenders did not get repaid.
Countries that run trade deficits do not save; they live on borrowing from abroad. The going is good while the foreign loans are flowing in, partly due to real estate bubbles and stock market bubbles. But eventually, they lose credit. Cyprus has now lost credit.