Photograph by Leonid Mamchenkov
Eurozone finance ministers and the IMF have agreed a €10 billion bailout deal for Cyprus to keep the country in the Eurozone and to prevent its banking system collapsing. The deal came just hours before the deadline for an agreement set by the European Central Bank (ECB) after a week of financial turmoil in the island country.
The deal sees Cyprus making significant changes to the structure of its banking sector along with some tax rises and privatisations of state-run industries to raise €5.8 billion. These measures are designed to raise billions towards the bailout, but in contrast to the previous EU-IMF deal, the savings of people with deposits of under €100,000 are protected.
Laiki Bank, the troubled second largest bank in Cyprus will be closed down with deposits of under €100,000 moved into the Bank of Cyprus which will face significant restructuring, but deposits of over €100,000 will be frozen and moved into a “bad bank” where they risk being raided as part of the restructuring of the financial sector.
What Went Wrong for Cyprus?
Prior to 2008, the country’s public finances were described as “sound” by the IMF reflecting the Cypriot economy’s long period of high growth and low unemployment. The Cypriot recession in 2009 was also one of the mildest within the Eurozone.
However, during the good years Cyprus developed some vulnerabilities including a property boom, a rise in credit, and a number of loans to Greece which were cut in the Greek relief effort last year. The rapid growth of the financial sector also caused some problems, with the loans made from just the Cypriot banks coming to 160% of the countries GDP, and including international banks that number rises to 835%.
Whereas the government of the UK and other countries around the world have bailed out their banks from recent financial issues, with banks such as RBS becoming essentially nationalised financial institutions, the Cypriot government cannot afford the recapitalisation their banks require.
Money Laundering Accusations
Whilst most countries receiving bail out packages from the EU are required to raise funds themselves through raising taxes and privatisation, some in the Eurozone were especially suspicious with giving funds to Cyprus due to accusations that the country is a haven for money laundering from Russia. European ministers were reluctant to provide bailout funds that some say would essentially be safeguarding Russian money of dubious origins.
