Cyprus Financial Crisis: How, When & Why


The Cypriot financial crisis was generated by the exposure of Cypriot banks to the Greek debt haircut, the downgrading of the Cypriot economy to junk status by international rating agencies and the inability of the government to refund its state expenses.

In September 2011, just 2 months after the Evangelos Florakis Naval Base explosion, the credit rating of Cyprus was downgraded by all major credit rating agencies. Despite Cyprus's population and small economy, the island has a large off-shore banking industry that was shaken to its foundations during the financial turmoil. With a total amount of €19.5 billion, the country was unable to stabilize its banks.

A report published a year ago by a team of 16 Cypriot economists attributes the causes of the crisis to sliding competitiveness and increasing public and private debt that were exacerbated by the banking crisis.

Since January 2012, Cyprus has been relying on a €2.5 billion emergency loan from Russia to cover its budget deficit and re-finance maturing debt. The loan has an interest rate of 4.5% and it is valid for 4.5 years. It was originally expected that Cyprus would be able to fund itself again by the first quarter of 2013. When Fitch downgraded bonds issued by Cyprus to BB+ last June, the Cypriot government requested a bailout from the European Financial Stability Facility or the European Stability Mechanism

The Cypriot government expressed disagreement over the bailout terms, and continued negotiation with Troika representatives concerning possible alterations to the terms throughout the following months.

On November, the government handed its counter-proposals to the Troika on the terms of the bailout. The bailout terms were made public on 30 November.They include strong austerity measures, including cuts in civil service salaries, social benefits, allowances and pensions and increases in VAT.

On 16 March 2013, the EU and International Monetary Fund agreed a €10 billion deal with Cyprus. As part of the deal, a one-off bank deposit levy of 6.7% for deposits up to €100,000 and 9.9% for higher deposits, was announced on all domestic bank accounts. Savers were due to be compensated with shares in their banks. Measures were put in place to prevent withdrawal or transfer of moneys representing the prescribed levy.

The deal required the approval of the Cypriot parliament, which was due to debate it on 18 March. According to President Nicos Anastasiades, failure to ratify the measures would lead to a "disorderly bankruptcy" of the country.

The Russian government "blasted Cyprus's bank levy, piling more pressure on Nicosia" ahead of the parliament's vote on the bailout. Russia has decided to extend its existing loan to Cyprus but hasn't shown interest in doing more as reports say that Russia felt betrayed due to Mr. Anastasiades friendly moves towards Europe.

The deal was rejected by the Cypriot parliament on 19 March 2013 with 36 votes against, 19 abstentions and one not present for the vote.

Cyprus is now the center of attention for all European States and even for more.
It's strange how an island that small can influence all west countries that much, isn't it?

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