What’s the matter with Cyprus?

Cyprus has gotten a great deal of attention recently because it has run into very severe problems with its banks.  As a result, it has come looking for a bail-out from the European Union.  How did this come about?

It turns out that Cyprus is something of a banking haven for Russian plutocrats who were looking for a “safe” place to stash cash.  As we all know, banks accept deposits but they don’t simply keep those deposits in the vault.  They lend the money out to make a profit.  The problem the Cypriot banks faced is that they received so much money that they were forced to look for investment opportunities in other countries, like Greece.  So the Greek financial crisis became the Cypriot financial crisis, losing the banks billions and wiping out their capital. 

Now, if you’re a country like the US, you just print dollars, lend it to the banks and everything gets fixed.  Unfortunately Cyprus is part of the European Union and can can’t print Euros.  They are at the mercy of the EU leaders who have money to lend.  And the EU leaders are getting more and more reluctant to tax their citizens to bail out countries that live beyond their means and bankers who make big mistakes.

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