Little Cyprus causes panic.

Reacting to the constant howling by selfish politicians and bandit businessmen the RBI reduced interest rates by 25 basis points on 19 March. This should have caused enormous rejoicing and rallied the markets but the opposite happened. The Sensex fell for 7 days to around 18,600 level. Surely if a lower interest rate was going to get the " animal spirits " roaring again this was a damp squib. The reason was events in faraway Republic of Cyprus which is about 60% of a tiny island in eastern Mediterranean, a member of the Eurozone with a GDP of just 18 billion Euros. Cyprus was an offshore tax haven, especially favored by Russian oligarchs. At the end of January banks in Cyprus had deposits of 68.4 billion Euros or $89 billion, nearly 5 times its GDP, of which Russians owned 19 billion Euros or $25 billion. However, the troubles for Cyprus started far away in Brussels at 3 AM in late October 2011 when Eurozone leaders and the IMF agreed to write down 50% of Greek bonds. This meant that Cyprus banks holding Greek bonds would lose 50% of their value. In reality it was 75%. New York Times, 27 March. Cyprus banks lost a total of 4 billion Euros which was an impossible sum for a GDP of 18 billion Euros. To add to their troubles the EU also raised the amount of capital a bank needed to hold to be considered solvent, known in India as the Cash Reserve Ratio. Depositors started a run on banks and a property bubble collapsed leading to further trouble for the banks. Cyprus tried to avoid a bailout by borrowing 2.5 billion Euros or $3.2 billion from Russia but this was not enough. In fact it may have given time to Russian oligarchs to withdraw their money from foreign branches of Cyprus banks. When eventually Cyprus asked for EU help the terms were severe because Germany sees it as helping to avoid taxes and in money laundering. Deposits up to 100,000 Euros would be protected. Anyone with more than that would face a 40% haircut. The second largest Cyprus Popular Bank, also known as Laiki Bank which lost 2.3 billion Euros, would close leading to the loss of 2,500 jobs. Unemployment, which is at 15%, is expected to rise sharply. Ordinary people will lose jobs, see their salaries and pensions cut and many will face real poverty. Banks in Cyprus were closed for 2 weeks and are opening today. However, no one will be allowed to withdraw more than 300 Euros per day and there will be strict controls on money being transferred to other countries. It remains to be seen whether Cyprus can remain in the Euro or is forced to leave, resulting in runs on banks in countries such as Greece, Spain and even Italy. Government banks in India have enormous bad loans and the property bubble is a humongous abscess waiting to burst. The panic caused by little Cyprus should be a warning. But is anyone listening?