Economists explain: How will the Cyprus banking crisis affect Australian SMEs?

The Cyprus parliament has defiantly rejected a eurozone bailout proposal which mandated a strong levy on banks – but local economists say Australian small businesses don’t have much cause for worry.

The latest financial turmoil has placed global markets on edge, erasing recent gains on the Australian sharemarket and causing business confidence – which has been fixated on international turmoil rather than domestic economic improvement – to fall. Business owners fear a return to the tumultuous first days of the global financial crisis.

But AMP Capital Investors chief economist Shane Oliver told SmartCompany the instability in Cyprus would have little impact on Australia.

“The impact will be minor; obviously it’s a trivial economy making up about 0.2% of the eurozone with approximately one million people. It’s unlikely we have much of a direct relationship with them at all,” he says.

However, Oliver did say there is a risk the Cyprus controversy will have a knock-on effect to other countries in the eurozone.

“That’s why the Australian sharemarket and global markets are responding,” he says.

The latest bailout offer from the European Union, the European Central Bank and the International Monetary Fund mandated a levy on banks, but this was ultimately rejected by the parliament. The country is still searching for €5.8 billion ($A7.2 billion) to plug a fiscal leak.

Oliver says the situation with Cyprus banks is unique and will ultimately have little impact on the rest of Europe.

“It’s a different situation to other countries in Europe, so I doubt it will lead to any crisis.”

“The Europeans are worried about giving too much money to Cyprus and consequently bailing out Russian depositors. The Cyprus banks are affected by money laundering and people moving money there to escape tax obligations. It’s a very different situation to Spain, Greece or Italy.”

JP Morgan senior economist Ben Jarman told SmartCompany the real story will be revealed in how the negotiations pan out between Cyprus and the eurozone.

“It’s probably too early to call this a game-changer, if there will be a greater underlying story it will be reflected in the negotiations between Europe and Cyprus in the next few days, weeks or months.

Jarman says while the Australian sharemarket is currently being impacted by the situation, it’s unlikely to have an impact in the long term.

“The issue here is that having had an Italian election which was disruptive, Cyprus is compounding that and it takes us back a little bit toward the situation in the first half of 2012.”

“There is an extent where we should realise the sharemarket has had a good run and we knew something would puncture it and this is what it is. At the end of the day, the markets are still having a good run,” he says.

Oliver says there are two possible courses of action for Cyprus. The first is the banks go bust and depositors lose more money, or a compromise is reached once the country “realises it is faced with a real banking collapse”.

The eurozone has said Cyprus must raise €5.8 billion out of the €15.8 billion bailout package.

Oliver and Jarman say the sharemarket is likely to feel “the brunt” of the financial instability in Cyprus until a conclusion is reached.

“It’s up to the region policymakers to determine if there is a measure which will extract some teeth, but allow it to be passed in the Cyprus parliament, it will be a compromise measure,” Jarman says.

“The problem is markets will worry about these things until they are resolved,” Oliver says.

 

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