People have been jittery about the Greek economy for some time. But Cyprus, the tiny island country off the coast of Greece, recently sent people from all around the world into panic mode.
It’s a bit like Chicken Little to be fretting over the finances of a tiny republic in the Mediterranean when the S&P 500 finished on March 28 above its all-time highest close – marking a full recovery from the financial crisis that wiped out more than $10 trillion in equity value — but since you asked: Could Cyprus’ problems, like Greece’s, spread like a virus over Europe and topple the world economy back into deep recession?
In a word, No. Cyprus is a tiny country. Its GDP is only about $24 billion. To put that into perspective, that’s about one-quarter of the cash Apple has sitting in the bank. Yes, Apple could bail out Cyprus.
Cyprus’ trouble stems from its status as a banking center and tax haven for Russia. The country’s low 10 percent corporate tax rate brought more than $162 billion in assets – seven times the country’s GDP – flowing into Cyprus like a river of Retsina wine.
The entire economy grew dependent on wealthy Russians. There was very little growth elsewhere. And as a savvy investor you know how important diversification is. When the Cypriot government overspent, it had no place to turn except the banking sector. So the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Union (EU) came to the rescue. And many Cypriot depositors are out of luck. People with more than 100,000 Euros, or $131,000, in Cypriot banks will have to give up between 10 and 60 percent of their savings to “jointly” bailout the nation, along with the assistance of the IMF.
Cyprus is a sad reminder of the importance of organic and sustainable growth. No country – and indeed, no individual investor – should rely on just one industry sector or just one country for its livelihood.
What happens next? Money will flee Cyprus for some other tax haven, and the country will sink into a deep depression like Greece.
But we’re not Greece. And we’re not Cyprus. Can you imagine the protests in Washington if the government took our bank deposits to pay their bills? I’d charter a whole caravan of buses from Atlanta, and I’ll bet many of you would join me.
No, our government will continue to fund its debt by raising taxes, reducing government spending and cutting into entitlements like Social Security and Medicare.
That may not be good news for all. But it’s a lot better news than Cypriots woke up to recently. And sometimes, you have to take the good news where you can get it.