Cyprus is a small country of a million people with a large problem, that just exploded across the international scene this week. This hasn't been a sudden crisis, as Cypriots have been asking for assistance since June. The current situation is a result of the financial crisis, as Cyprus had been known for its attractiveness for foreign deposits.
First, lets go over some basics. A few days ago, it was announced that Cypriot bank accounts with more than 100 000 euros would lessen by 9.9% as part of a 10 billion euro rescue package from the IMF and ECB, while lesser bank accounts would pay 6.75%. Russia is very interested in the outcome of this event, as Russian citizens have been using Cyprus as a tax haven, holding around 20 billion euros cumulatively in the country. As part of the deal, an independent audit of the bloated Cyrpiot banks will occur, as France and Germany accuse the banks of laundering Russian money. Russia, in response, will most likely extend their 2.5 billion euro loan.
However, this deal was rejected by the Cypriot Parliament. The rejection is causing all the media fuss.
Cyprus must now provide a new plan on how to pay their debts and continue financing their country without bankruptcy. Should the nation default, they will relinquish their EU citizenship which will most likely cause contagion in the rest of the European project.
As a result of the uncertainty, banks will be closed in Cyprus for the next week to prevent a bank run. Negotiations will continue, but tensions are high. Russian PM Medvedev stated that the situation reminded him of the Soviet policies that robbed Russians of their savings. However, Russia has been rumoured to be after the vast gas resources surrounding Cyprus in exchange for short term relief. Other sources of potential financing are the Orthodox Church, who has volunteered to mortgage their real estate to raise funds.
|Beautiful country hiding some ugly debt.|
CBC had an article stating why this event affects Canadians, stating individual banks were raided, a potential run on the banks, Russia's involvement and somehow linking the plausibility that a similar situation could occur in Canada. These arguments are massively over blown. First, the raid on the bank accounts was one time tax, or levy. Most of the accounts in these banks were not of Cypriot citizens, but of foreigners trying to hide from their homeland's taxman. Russia is involved because their citizens have 20 billion euro's in deposits involved, and is guarding their interests.
In other words, this situation is quite different from North America.
The one point raised is the continual deterioration of the Eurozone, which is quite troubling. Afraid of default, the European Union has continued to offer leveraged bailouts and bond buying programs to solve their crisis, which is simply not working. Most likely, a default will occur sooner rather than later in the EU, which will spark the next debate.
The question of continual existence of the European Union.