CYPRUS…ON THE ROCKS
(…facing a cocktail as bitter as the one Socrates drank)

 Cyprus has had a very turbulent history and the EU’s bailout terms are just adding another wild chapter to that history.

After a relatively peaceful and prosperous respite from all the hard times that followed the end of WWII, as the smallest of the EU’s economies, it now faces a total fiscal and economic meltdown, leaving its people wondering how did it all go wrong.

In part, the situation is of Cyprus’s own making. As with so many other EU members, the Cypriots’ government engaged in the same kind of insouciant practice of deficit spending and borrowing…without any kind of serious revenue base to sustain it.That is, an almost non-existent local taxation system, a free-wheeling banking system making it a favored “tax haven” for foreign deep pockets to park both their hard-earned and ill-gotten gains away from the grasps of their own tax famished governments. Capital deposits that could vanish like smoke at the slightest hint of any kind of insecurity or uncertainty, thus constructing its banking infrastructure on a very shaky foundation.

And though thanks to its mild climate it enjoyed an active retiree and tourism industry, sustained by a host of small service providers catering to these, Cyprus had little else to depend on for its economy to keep the good times rolling on. 

So now here it is…Cyprus on the rocks…facing a cocktail as bitter as the one Socrates drank. Its banks are closed, and when they reopen (if they do), everyone will find long, sticky fingers of taxation reaching into everyone’s pockets…no matter how small. The foreign deep pockets will growl and grumble as they pay up their taxes on those deposits, but then, as soon as possible, will quietly, rapidly, pull what’s left out of there…searching for other “havens” elsewhere.

There’s a moral to this sorry tale which is…no government can long endure if it borrows to cover its spending sprees, without a proper revenue base to cover those markers. Cyprus is not alone, of course, Greece, Spain, Ireland, Iceland, not to mention our own Uncle Sam, all have the same problems.

It all comes down to fundamentals. As my old economics professor at Georgetown use to put it…unlike water…money…flows uphill…to the highest rate of return and…much like migratory fowl…will always fly off to other environments offering the best combination of security, returns, and minimal taxation.

Apparently too few governments have learned how to observe those fundamentals.

CENTURION