Business World

Saturday 30 August 2014

The proposed deal – and its implications

Published 19/03/2013 | 05:00

  • Share

Q What's all this fuss about Cyprus?

  • Share
  • Go To

The island-nation secured a long-awaited bailout agreement early on Saturday with the EU and IMF, worth €10bn. The key to netting a deal was to find a way to bring down the bailout package, originally estimated at €17bn. But the sting in the tail was a one-off tax to be levied against bank deposits.

Q Why did the island need a bailout?

The IMF described the island before 2008 as having a "long period of high growth, low unemployment, and sound public finances", but its banks have been heavily exposed to Greece and it has also suffered from its own property crash.

When Greece went belly-up, Cyprus's banks were hit hard. Ireland's bailout of its banks cost about 40pc of GDP. It has been speculated that Cyprus's could be about 60pc.

Q Why has the bailout caused such outcry?

Unlike other rescue deals, members of the public with deposits in Cyprus's banks are going to have a one-off tax levied on their money. In early proposals, amounts up to €100,000 would attract a tax of 6.75pc; deposits of over €100,000 would be taxed at 9.9pc. These figures were still under debate last night. In return, depositors will get shares in their banks.

Cyprus has deposits in its banks from foreign investors, particularly Russians. Some of this is suspected of being laundered and this is a key rationale for the tax. Unfortunately, ordinary Cypriots are also being hit.

Q how did cypriots react to news of the deal?

Not well. People flocked to ATM machines to withdraw their cash in advance of a vote on the deal by the parliament.

That vote was expected to take place on Sunday, but was then delayed until yesterday and was subsequently put off again until today. Banks on the island have been closed because of a bank holiday, and they will remain shut until Thursday.

Q this all sounds very serious. could it have a knock-on effect elsewhere?

There are fears of contagion spreading to Spain and Italy. The euro yesterday hit a low for the year in early trading, while stocks and commodities slumped across Europe and Asia.

Enterprise Minister Richard Bruton said the bailout was designed to avoid contagion elsewhere. But Moody's said the decision to impose losses has negative implications for European bank creditors.

Q could the same treatment be forced on countries that have been given a bailout, like ireland?

The Department of Finance has stressed there are no implications for Ireland or any other nation in the EU and that the measures are "unique" to Cyprus.

Q What happens if the cypriot parliament votes the deal down?

Your guess is as good as anyone. The terms of the deal may be eased, or worst-case scenario, Cyprus doesn't get a bailout and may default on its debts leaving the euro area mired in even greater crisis.

Irish Independent

Read More

Editors Choice

Also in Business