What is Cyprus Bailout Crisis

By | March 18, 2013

Cyprus is an island country in the Eastern Mediterranean Sea. Cyprus is the third largest island in the Mediterranean Sea, and a member state of the European Union. With talk of another bailout to Cyprus has caused jitters in world financial market when most of them were trading at new highs. Let me explain why this small EU member has caused all world markets to tumble.

1. What happened in Cyprus last week?

It all started from 2008 Financial crisis, Greece Economy collapsed, EU gave 3 Bailouts to Greece . The prices for the bailouts were high: austerity policies that didn’t work. The result everywhere is that national income has fallen steeply, while the countries fall further into debt.Cyprus banks got into trouble from their exposure to neighboring Greece. FM of Euro nation,IMF and ECB came with a plan to bailout Cyprus but this time the bailout conditions were little harsh:

In exchange for €10 billion ($13 billion) in rescue money, Cyprus Government would impose a one-time tax of 6.75 percent on all bank deposits under €100,000 ($131,000) and 9.9 percent over that amount, while Cyprus cut government spending and raised revenues. The decision to make depositors pay was a stunning departure from past EU-led bailouts.

With this decision is place freaked-out bank customers rushed to ATM’s to withdraw as much cash as possible. Many citizens life saving saw an haircut to as much as 10% in a matter of day.

The Cyprus government announced a bank holiday on Monday (a national holiday) and temporarily halted all electronic bank transfers. The bank holiday has now been extended until Tuesday.The Cypriot Parliament was originally supposed to meet on Sunday to vote on the deal, but the vote has been postponed until Monday.

 

2. How much money will be raised and what will it be used for ?

The money raised by this decision will be worth 5.8bn euros, or a third of Cyprus’s GDP.Money obtained through the one-time tax would go to recapitalize Cyprus banks and service the country’s debt.
3. Who would get hit by this deal?

Bank owners, unsurprisingly, are not being asked to pay into the package. Bank depositors are. This number includes ordinary Cypriots, British pensioners, and others who have their money in the banks, including a large number of wealthy Russian and Middle Eastern depositors. The depositors have been promised bank shares in exchange for the money that gets grabbed. But, um, who wants shares in banks that are in the financial toilet? Exactly no one. There has also been chatter that depositors will be given some kind of interest in bonds from gas fields presumably controlled by Cyprus.

4. What’s at stake?

Unfortunately, this is going to be ugly any way you slice it. On Monday, if Cyprus’ Parliament says no to the deal, there will be chaos because everybody will think the banks are belly up and there will be a bank run. That could be something like Lehman Brothers, meaning chain bankruptcies and panic throughout Europe.On the other hand, if Parliament takes the deal, then a rescue will happen, but under terms that put everyone at risk. The message will be out that depositors in the euro zone can get hit and people in Italy, Spain and Greece will be particularly freaked out. The possibility of a bank run in those countries will grow.

Compiled from http://www.alternet.org/

 

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