The Cyprus Bailout: Destination Unknown


The small island nation of Cyprus is the latest EU member to require financial assistance in the form of a bailout. Spiraling debt has left the country on the brink of bankruptcy as both its main banks edge towards insolvency. On Saturday the details of a financial aid package were hammered out and presented to the Cypriot government, the terms of which were unlike any other debt restructuring programs previously presented by the EU.

The bailout proposed by the EU and IMF would provide Cyprus with a much needed €10bn injection of liquidity into the economy, however only on the condition that a one-off universal levy on bank deposits be imposed. Savings worth over €100,000 would receive a 10% levy, with deposits worth over €20,000 being hit with a 6.75% tax. In total, should the deal go ahead, the controversial bill would see saver’s deposits take a hit of €5.8bn.

The bill, which Cypriot lawmakers labeled an attempt at “blackmail”, has been held up in parliament as no consensus can be made. Most recently on Tuesday, it became apparent that progress on the matter was going to be slow and painful; not one MP voted in favour of the aid package, despite the threat of Cyprus being plunged into a deeper crisis. All the while the banks have been closed until Thursday to prevent a rush to empty bank deposits.

Opposition to the bill has been so vehement throughout the island nation that the Cypriot government is now looking away from the EU and towards Russia in a last ditch attempt to avert the levy on bank deposits. Russia actually has a vested interested in the path Cyprus takes, as it is estimated around 50% of total savings in Cypriot banks are actually Russian.

All European eyes are on Cyprus

Moscow, which described the terms of the bailout as “unfair, unprofessional and dangerous,” may be able to offer a viable alternative for Cyprus. On Wednesday Cyprus’s finance minister held talks in Moscow seeking financial assistance, much to the embarrassment of the IMF and EU after their bailout proposals were rejected outright.

Work on a “Plan B” is now underway, but policy makers will have to move fast. It is expected Cyprus will ask Russia for €2bn, arguing that this will be lower than the amount that would be levied on Russian companies otherwise, which have an estimated €25bn invested in Cyprus. Various schemes as to how to raise the other €4bn required have been proposed, including raiding the state pension reserve funds, but it is not clear yet whether the EU and IMF would raise objections to such a move or not.

As Cyprus works out how to proceed, the world waits with baited breath. It has already stunned the EU and IMF after voting down their proposed plans, but it is not clear yet whether this was decision was smart or shortsighted. The initial proposal required the imposition of this levy in order to receive the €10bn bailout, and there is no confirmation as to whether the EU will honour this amount should Cyprus raise the required €5.8bn through other means. Ultimately, the future of Cyprus is out of its leader’s hands.



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