Cyprus Financial Crisis - Essay Example

The straw that broke the camel's back was when the European Union decided that Greece needed a "haircut" of upwards of 50% on its bonds. Cyprus banks had massive investments in that country and that decision by the EU crippled the Cypriot financial system as it was not able to absorb the cost.
Talks about the bailout started way back in June last year. The former president, Demetris Christofias balked at the measures put forward to help the economy. After he was defeated in that year's election by president Nicos Anastsiades, the talks resumed.

Key elements of the deal were that Cyprus had to raise its corporate tax from 10% to 12.5%, privatize state assets and overhaul its banking system. This was to ensure that their banks were no havens for laundering money. Russia its key ally was expected to make its contribution by reducing the interest rate on the 2.5 billion Euros it had lent them earlier. The contentious issue was that Cypriot bank depositors were forced to take losses on their money. After days of negotiation, it was agreed that a one-off tax of 9.9% would be levied on bank deposits of $130,000 and above while the small depositors would be taxed at 6.75%.

Moreover, the country had to wind up Laiki Bank, its second-largest bank.
The actions taken by the EU in Greece and Cyprus have brought about a precedent that other countries should take care not to fall into a financial crisis. It started with Greece where the country took a massive “haircut” on its bond market. Now it's Cyprus where bank deposits are being cut in order to finance the debt burden. What next will happen if another country in the eurozone falls into a financial crisis? With Italy’s economy not looking that good, we will have to wait and see. Read More