In a recent article, we looked at the efforts by the government of the tiny European Union (EU) nation of Cyprus to acquire a multi-billion dollar bailout of its financial system. Cypriot officials cited massive exposure to Greek government debt and other risky investments as reasons for its deteriorating economic environment, and while some EU officials have stated plainly that help will be given to those who need it, there are signs that the Cyprus situation could get worse before it becomes better.
UBS AG, a Switzerland-based financial services institution, released a study earlier this month that looked into some of the specifics of the Cypriot financial system. According to the results, there is a substantial imbalance created by the size of the island nation’s banks and the country’s Gross Domestic Product (GDP) as a whole. Cyprus’s yearly output is approximately 20 billion euros, according to Deutsche Bank, yet its banks hold total assets equal to roughly the same amount.Additionally, the nation’s debt-to-GDP ratio is approximately 71.5 percent in 2011, and the ongoing recession and drop in tax receipts are expected by some European economists to make this issue worse.
These facts have the potential to create a serious level of volatility in EU equity markets if buyers of Cypriot government debt decide their investments in the island nation are too risky. On January 21, outgoing Eurogroup chairman Jean-Claude Juncker – who oversees a body of European finance ministers – told reporters during a press conference that any bailout of Cyprus will have to wait until March at the earliest. This could complicate issues further, especially considering the fact that federal and legislative elections will be held starting on February 17.
Investors in European businesses and markets should take note of these developments and adjust their exposures accordingly. Putting funds into harder assets, such as gold and cash flow real estate, might be a prudent form of wealth preservation during these troubled economic times. For more information and useful tips about how to navigate a volatile global economy, visit GreatWealthStrategies.com today.