Why the Cyprus Crisis Could Present Bargains for Holiday Makers
What is the Cyprus Crisis?
The nation of Cyprus requested a bailout from the European Union and the IMF. It received a 10 Billion Euro bailout with an amazing condition. The cost of the bailout would come in the form of a levy on Bank of Cyprus and Laiki accounts with deposits greater than 100,000 Euros. Anything under 100,000 Euros will be "fully guaranteed".
Bailouts like the U.S. government bailout of General Motors were made at the expense of bond holders or stockholders. Mutual funds, pension funds and individuals were told to accept pennies on the dollar or receive nothing at all. However, the average citizen making payments on a G.M. car wasn't told to pay another fee on top of the monthly payment. Iceland made itself whole by seeing its largest banks essentially declaring bankruptcy.
Holders of IceSave accounts in the UK with more than 100K saw their savings wiped out. Icelanders saw their currency devalued, and shareholders in their banks were pummeled. But citizens of Iceland were not personally liable or punished beyond inflation for the financial mistakes of its banks.
Cyprus is the first case in modern history where a government entity, the E.U., is seizing portions of bank accounts as a condition of a bailout. The bank shareholders are not penalized, as the shareholders in many rescued banks, investment funds and bond funds have suffered in prior bailouts with decreased share values or "haircuts" on the value of bonds. When Ireland received a bailout, the average taxpayer became liable for the national debt that the country as a whole must pay back, but the money in the bank was untouched.
If it wasn't for then finance minister Brian Lenihan, the Irish Banking system would have crumbled in 2008. Mr Lenihan stalled the panic stricken Irish public with a blanket government guarantee to bank depositors and crucially, also to the banks bondholders. Never has a bailout come with the demand that the bank accounts of all citizens and businesses be levied (anything over 100k).
The justification for this levy is two fold. First, Cyprus has been a 'safe haven' for wealthy Russians. At least half of all bank accounts in Cyprus are held by Russians. By levying all bank accounts, Russians who use Cyprus to safe keep their money help pay the cost of the bailout.
The second justification is that Cyprus is as close to default as Greece, but with a much smaller population. Thus it is less likely to pay back the bill for bailing out - so take the money from the people now. How will the Cyprus crisis affect the nation, investors and visitors in the short term and the long term?
What is the long term impact of this decision?
The EU administrators in Cyprus who shepherd through a "yes" vote on the bank levy, will be seen as run by the Troika and financial elites, not the nations that comprise its membership. Nations like the UK with independent currencies will become a safe haven for funds.
Now there's a bank levy on all Bank of Cyprus/Laiki accounts over 100,00 Euros, there could be a bank run through all of Europe. Countries like Spain and Greece who need bailouts could see their teetering banks collapse, because citizens are afraid to lose their personal savings when their government asks for a bailout.
If national governments on the edge start to teeter after a bank run due to this bank levy, the entire European Union could collapse. If this happens, the Euro will devalue and travel to all countries in the EU and will become quite affordable to those whose nations have stable currencies.
Now Cyprus has accepted a bailout and the EU survives the crisis, Cyprus could remain an easy destination for European Union visitors. Prices will likely fall on the island due to a cash crunch caused by the economic contraction the withdrawal of savers' money will cause.
The Cyprus bailout has resulted in a massive seizure of savings, hence there is a real possibility of unrest in Cyprus. Whether this unrest last a few days or months is unknown.
What does the Cyprus Crisis mean for property owners and tourists?
Anyone with a Bank of Cyprus/Laiki bank account in Cyprus has lost a substantial portion of their savings with deposits over 100,000 Euros. This is true for both natives, ex-pats and tourists who opened accounts to take advantage of the high interest rates Cyprus offered.
In the short term, property prices could skyrocket as investors shift to real estate instead of leaving money in the bank. Over the long term, property may become cheap to international buyers due to a lack of currency coming into the country. Rentals on the island will become cheap if you are paying in an internationally recognized currency, while many people who are unemployed rent out rooms and whole homes to earn enough money to pay for essentials.
If Cyprus is forced out of the European Union because it cannot pay its debts, Cyprus could get a new currency. The new currency could devalue quickly as assets flow out of the nation. In the short term, the nation may not be safe for tourists. In the long term, Cyprus could become a cheap Mediterranean destination for everyone who is not a native.
The financial crisis that has hit Cyprus will result in holiday bargains for Brits, according to one of the biggest independent tour operators specialising in the Mediterranean island. They are now forecasting a bonanza for British holidaymakers, as hotels slash prices to fill rooms left empty by Russian and German tourists shunning the island's beaches in the year ahead.
Harry Hajipapas, manager of Cyplon Holidays since 1972, said he expected tourism to re-emerge as the biggest industry on the island. "Tourism always was the number one industry, but it got overtaken first by construction and then by financial services. I think the travel industry is going to reassume the importance it had 20 to 30 years ago, although this year the German market might disappear
Noel Josephides, founder and managing director of Sunvil Holidays, said, "The number of British holidaymakers has actually fallen since 2000. What we are going to see, after the initial shock, is that prices will start to come down. They are not leaving the euro, but what will happen is a de facto devaluation."
Amongst all the controversy, Cyprus still remains a beautiful destination for locals, ex-pats and holiday makers alike. It'll take more than this crisis to jeopardise that.
Have You Been Affected by the Cyprus Euro Crisis?
Do you have another angle on this incredible dilemma in financial history? Maybe you have a different story to tell after experiencing it first hand in Cyprus? Are you a British pensioner or a Russian tycoon? The 10 Billion Euro bail out is only a fraction of the story. What's your thoughts and what do you think will happen as a result of the Cyprus crisis?
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