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Why Cyprus is not Italy

Cyprus is a small country where the banking sector’s assets are seven times its GDP. For this reason, a bail-out of the financial sector without substantial international help is impossible

Why Cyprus is not Italy

Pietro Reichlin

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Cyprus is a small country where the banking sector's assets are seven times its GDP. For this reason, a bail-out of the financial sector without substantial international help is impossible. In addition, Cyprus debt is highly dependent on foreign investors. According to some estimates, more than 25% of bank deposits and about one-third of foreign investments in Cyprus come from Russia. This makes the country's economy very vulnerable to massive capital flights and runs on national financial institutions.

None of these features are shared by the Italian banking sector. Most of the Italian stock of debt of private and government entities is held by Italians. Assets of Italian banks is a much smaller proportion of its GDP and a bail out of the banking sector, if needed, could be afforded by the Italian government with little international help by means of reasonable extra levies on the citizens' income or wealth. It is well known that the private sector's net wealth of Italian households as a share of the GDP is among the highest in Europe.

More importantly, Italian banks' capitalization is not particularly low by European standards, although the financial sector suffers from a loss of profitability and a high proportion of non-performing loans. Since 2007 the core tier 1 ratio of the banking system has risen from 7.1 to 10.4 per cent. Italy's main problem is a loss of competitiveness with respect to the European partners and the high public debt, while the financial sector appears to be relatively stable in the current situation.

 

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