Now that the dust has settled and Cyprus has raided their banks, the big question is what next?, or more specifically I should say who is next?
In order to understand the economics behind what has gone on in Cyprus, we must first understand the concept of Debt vs GDP ratio. Here is an excerpt from Wikipedia defining Debt-to-GDP ratio:
“In economics, the debt-to-GDP ratio is one of the indicators of the health of an economy. It is the amount of national debt of a country as a percentage of its Gross Domestic Product (GDP). A low debt-to-GDP ratio indicates an economy that produces a large number of goods and services and probably profits that are high enough to pay back debts. Governments aim for low debt-to-GDP ratios and can stand up to the risks involved by increasing debt as their economies have a higher GDP and profit margin. In 2011 United States public debt-to-GDP ratio was about 100%” http://en.wikipedia.org/wiki/Debt-to-GDP_ratio
So in layman’s terms it means how much a country owes in debt vs how much money the country generates in income as a percentage. The lower the percentage the better off the country.
This leads me to the next observation I made. However before I do so let me cast your memory back to the collapse of Iceland back in 2008. At the time of their collapse, their debt was ELEVEN times higher than their GDP! As a result here is what happened: “As a result of the crisis, Iceland underwent a severe economic recession; the nation’s gross domestic product (GDP) dropped by 5.5% in real terms in the first six months of 2010. Outside Iceland, more than half a million depositors (far more than the entire population of Iceland) found their bank accounts frozen, as a result of the foreign branches of the 3 Icelandic banks were thrown into receivership; and a subsequent diplomatic dispute (known as the Icesave dispute) also evolved over repayment of deposit insurance between Iceland at one side versus United Kingdom and the Netherlands.” http://en.wikipedia.org/wiki/2008%E2%80%932011_Icelandic_financial_crisis
So I decided to do a bit of research and found this chart regarding Debt-to-GDP http://www.tradingeconomics.com/country-list/government-debt-to-gdp. Just out of interest I took a hand full of countries and made a comparison by percentage order. Don’t forget the higher the percentage, the worse off the country.
2) Italy 127.10%
3) United States 101.60%
4) France 90.20%
5) United Kingdom 89.80%
6) Cyprus 86.50%
7) Spain 88.40%
8) Canada 83%
9) China 23%
10) Russia 9.60%
Here is the alarming part – Britain, France, Spain, Italy, Japan, United States and of course Cyprus are all in what I would call the ‘precarious’ zone. By precarious I mean 80% or above Debt-to-GDP. So I ask you, who is next? Which is the next domino to fall? I will let you decide.
Until next time…………………………….
Louise the “Financial Blogger”
*please note I am a financial adviser with a keen interest on finance and the economy. If you would like a confidential one to one meeting to discuss your options and yes there ARE options, please feel free to get in touch.