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The Venus flytrap: were they flies? 2013-04-22 오후 8:54:00

The one who dares to dive into the roads to ruin.

Paul Krugman, 2008 novel winning economist, answered to the question “what you think they should do?” in his latest New York Times article.

So here it is: They should leave the euro. Now.

The reason is straightforward: staying in the euro means an incredibly severe depression, which will last for many years while they try to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding.

He continues,

If you look at their trade profile, you see just how much damage the country is about to sustain. This is a highly open economy with just two major exports, banking services and tourism-and one of them just disappeared. This would lead to a severe stump on its own.

It is a best area for romantic break; it is warm in summer and very mild to winter; it is bursting with beautifully white beaches; it is Aphrodite’s birthplace and perfect for wedding. A small island-240 kilometer long from end to end- located on the Mediterranean Sea and millions of people visited each year is Cyprus. Like a warm, soft, heaven-like twilight, Cyprus is one of the coolest places to travel for romance.

In contrast to that romance, however, Cyprus recently agreed to a set of measure that raising 5.8 billion euro by Cyprus itself to qualify for a 10 billion euro bail-out from the IMF, European Commission, and European Central Bank: Troika.

And because of the agreement, depositors-holding more than 100,000 euro-might lose about 40% of their savings.

Furthermore, Cyprus became the first euro zone member country to bring in capital controls- restrictions on cash withdrawal (over 300 euro a day are banned), money transfer, and movement of cash in and out- to prevent catastrophic bankruptcy.

Conversely, financial crisis on Europe in 2008 -Greece default as a starting point-is exactly the same– in that happened by finance- but different bail-out plans were suggested and neither capital controls nor depositor haircut happened.

Then, what’s the matter with Cyprus?

First of all, Cyprexit- Cyprus+Exit- is less influential than both Spain and Greece.

And Cyprus is, in fact, bound to collapse because of the following reasons: They built their palace on the sand on the wrong place; tail is wagging the dog.

Nevertheless the GDP of Cyprus is 17.9 billion euro, consisting of 0.2% of Euro zone’s GDP, they attracted billions of dollars by tax privilege-low tax but high interests, so called Tax Haven.

As Cyprus is well regulated as a tax haven-no wealth tax, pay no taxes on income gained outside of its territory, granted privacy and no need for financial report to any authority, for example, it has favored conditions for companies and bankers-or even for Mafias-to start their business, open an account, and invest. What is more, there is legislation to protect privacy or secrecy. As a result, Cyprus gained large sums of funds from every corner of the world.

Based on them, banks in Cyprus invested to Greek government bonds with funds almost 160% of their GDP to get high interests- so called, Hot money- from it at that time.

Unfortunately, however, they lost 75% of their funds out of 160% in Greece last year as a haircut amid bail-out of Greece.

And it follows a series of weakness in banks of Cyprus, each of weakness that rolled up into a much bigger picture, turning financial conditions of Cyprus into the kind of thing they never wanted to be-they seemed like a train without brake rushing for the disaster zone.

“Like an Iceland and Ireland,” said Rui Jong Il, professor of KDI, “development based on finance is like constructing your building over the sand in that expansion of finance over as an assistors of real economy-concerned with actually producing goods and services-infallibly bears bubbles, and crisis in the end.”

Accordingly, even though it is a small island, one million people in residence, unprecedented capital controls and depositor haircut happened and Cyprus-absurdly grew up with finance in the absence of development in real economy- became a hub for Euro-zone crisis.

Romance and the plan-B are two sides of the same coin, called Cyprus.

Henry Ford said, “Failure is simply the opportunity to begin again, this time more intelligently.”

However, they treated their financial system like a household appliance. They expected their abnormal financial system to work quietly in the background, and they lose sight of how crucial the financial crisis was until the day they’re stuck with dirty socks.

In other words, notwithstanding the 2008 financial crisis-considered as the worst crisis since the Great Depression-occurred, yet international system of finance has not changed its roots.

Full of uncertainty, caught between everlasting rise and fall of finance, bubble as a result and crisis in the end, one thing became clear: They will never in a million years swim out of the lake unless they learn how to swim.

For them to survive, they might need someone to teach how to swim.

And they also have to remind- as the book I read points out-an excellent manual on swimming is useless till you jump into the pool. Getting wet is what it's all about.

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