Beyond Cyprus

Nicosia is monitoring its currency with fingers crossed. The recent easing of some of the restrictions imposed earlier has enabled banks to operate as usual but with stringent calculations to keep.

The government has put a ceiling of 5,000 euros per month per person for debit and credit card purchases abroad in an attempt to ward off flight of capital from the country. The intention, of course, is to safeguard and stabilise the Cypriot financial system. But will the embattled administration be successful in keeping the lid on expenses and withdrawals, and if so then for how long? This is the question that is being debated not only in Cyprus but also in capitals across the eurozone. Many say that after Italy, Spain and Greece, Cyprus will not be the latest port of instability. There could be many more from Malta to Latvia or even Belgium or Luxemburg. The reason is that banking sectors and foreign direct investment avenues do not possesses the necessary insulation from external shocks, and could cave in under immense pressure.

A glance at the financial balance sheet of eurozone member states lists out more fragile economies and, especially, those with bigger banking sectors who sit on the verge of a disaster. Bailouts that are in vogue across the eurozone could soon become a permanent feature of annual business activity, until and unless something serious is done to boost the economy from within. A fully functioning and integrated banking sector is the need of the hour and such an arrangement could provide the minimum basic requirement for warding off an acute financial crisis that blew across Southeast Asia in the 90s. The debate over austerity and spending has to graduate into institutional reforms.

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