A Cyprus exit from the euro union, if it comes to that, would have a devastating effect on the country’s citizens, who are among the most indebted in the euro zone. And for European unity and diplomacy, the Cyprus debacle has already been at least a short-term disaster.
From a financial standpoint, what is most noteworthy is that the combined debt of the Cypriot people, companies and government is 2.6 times the size of the country’s gross domestic product. Only Ireland, still struggling to recover from the banking collapse that required an international bailout in 2010, has a higher debt-to-G.D.P. ratio among euro zone countries.
As debts in Europe mount in inverse proportion to the ability of its citizens, companies and governments to make good on them, the view is forming in Berlin and Brussels that a signal must be sent that citizens and investors must start accepting losses for the euro zone to survive in the long run.
Eric Dor is a French economist who has studied the mechanics of how a country might remove itself from the monetary union. By his calculations, the euro zone — through its central banking system and its national banks — has just 27 billion euros in outstanding credit exposure to Cyprus. That is a mere rounding error compared with the euro zone G.D.P. of 9.4 trillion euros.
Estimates of the potential cost if Greece had been forced into a disorderly euro exit have ranged from 200 billion euros to 800 billion euros, given the larger exposure that the European Central Bank and European banks had to the country.
So when the president of Cyprus admitted this week that his country did not have the money to backstop the 30 billion euros of guaranteed bank deposits — a figure greater than the Cypriot economy itself — a crucial bond of trust between a government and its citizens was snapped.
“It is the first time ever that the leader of a euro zone country has admitted that he could not afford to pay the guarantee,” Mr. Dor said.
Analysts project that the de facto devaluation would be not only immediate — estimates range from 30 to 40 percent — but extremely punitive, given the high household and corporate debts that burden Cypriots.
That means that in addition to Cyprus’s defaulting on its debts, many individuals and small businesses, the backbone of the country’s economy, would go bankrupt and the country would face a depression that could rival Greece’s in its severity.
“You would see genuine poverty in a euro area country,” said Gabriel Sterne, an analyst at Exotix, a London-based investment bank that specializes in distressed debt.
The price of imported oil in particular would soar, with profound economic impact because oil is used to produce electricity that already costs more than almost anywhere else in Europe, according to Alexandros Apostolides, a local economist engaged in such a study.
Already, Mr. Apostolides, points out, there are hints that Cypriots are bracing for the inflation that would accompany a devalued pound: many proprietors demand cash, refusing to accept credit and debit cards.
