Krugman declares Cyprus FUBAR

by pdxblake

This is pretty astounding stuff (here’s a reminder of the definition of FUBAR):

At this point the Cyprus situation is pretty clear — and clarity does not bring reassurance. In fact, it looks as if Cyprus has managed to combine in one place everything that has gone wrong elsewhere.

1. Runaway banking. Cyprus has a huge banking system — assets around 8 times GDP — based on a business model of attracting offshore money with high rates and good opportunities for tax avoidance/evasion.
[…]
2. Big domestic real estate bubble, Spain or Ireland-sized. Not yet fully deflated, which means lots more losses to come.
[…]
3. Massive overvaluation, with Cypriot prices and costs having risen much more than in the rest of the euro area.
[…]
In the end this probably comes, in some version, to what it should have been from the start — a big haircut on deposits over 100,000.

More available in the full post.

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