Here is Ernest Hemingway:
“How did you go bankrupt? Two ways. Gradually, then suddenly.”
Or rather this is how Rüdiger Dornbusch used to discribe the ‘stages’ of a crisis:
“The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”
So if you want to listen to the advice of these two gentlemen then you shouldn’t expect the Cyprus crisis to hit its climax this week, but if it does it will happen very fast. Or maybe they where not talking about Cyprus, but about Spain, Italy or Greece…
HT Matt O’Brien
The Market Monetarist 
Chris Mahoney
/ March 26, 2013Lars,
Well, one thing we know is that Cyprus has no debt capacity. Her economy is shrinking and her budget will have a big deficit in 2013. She won’t be able to finance essential imports, let alone service external debt. She is Germany in 1920. I would expect that she will blow up by summer.
Lars Christensen
/ March 26, 2013Chris,
Thanks for your comment. I certainly agree that the prospects for Cyprus are very bleak and I share your concerns that the country soon will be running out of funds.
Given the “sudden stop” we should expect the current account deficit to be closed very fast and as a natural consequence a collapse in the economy should be happening very fast. Furthermore, unlike Iceland in 2008 Cyprus do not have an independent monetary policy so it is hard to see growth resuming anytime soon.
On the question whether Cyprus will “blow up” by summer I have really don’t have any clue – or maybe Cyprus effectively already blew up – that at least is what I “feel”. The question therefore to me is when the country would leave the euro and/or default. My guess would be that that would happen “gradually, then suddenly”.
Ravi
/ March 26, 2013Take a look at Pissarides’ comments on Bloomberg TV, if you get a chance. He basically said, “Well, we need the Eurozone now, but in 2 years, we will think long and hard about remaining inside”. A truly stunning statement that European policymakers should not ignore. Perhaps it won’t even take 2 years if, as you point out, the economy fails to recover.