So Cyprus was dragged kicking and screaming to sign a 10 billion euro bail out deal with the European Union and International Monetary Fund after months of brinkmanship.
Just like Greece, Cyprus teetered on the brink of bankruptcy trying to drive a better deal for the nation’s government and banks before making a final agreement.
The agreement calls for reorganising the Mediterranean island’s banks.
This may be some task as Russians who flooded the country with fortunes of roubles now try to pull their money at the last minute to look for another tax-friendly regime.
Many of these Russians are the main targets of the bank tax designed to raise cash aid for the bailout, while savers and businesses with less than 100,000 euros in their accounts are unaffected.
The nation’s second bank – Laiki – will close and split in to good and bad bank, with the Bank of Cyprus taking over all accounts holding below 100,000 euros.
Cyprus QROPS Closed
Balances above this level can expect a levy of around 30% to fund the Cyprus’ 5.8 billion euro share of the bailout.
Bank of Cyprus savers in the UK are unaffected. The bank is a separate subsidiary and accounts are protected by Britain’s Financial Services Compensation Scheme. Laiki also has UK branches, but is not covered under the compensation scheme.
The problem in Cyprus goes back to heavy loan and investment links between the country and Greece – which was bailed out earlier.
The IMF estimates loans to Greece add up to more than 160% of Cyprus GDP.
Over recent months European Union leaders had accused the banks of money laundering and mismanagement. In 2012, HM Revenue & Customs closed down the Cyprus Qualifying Recognised Overseas Pension Schemes (QROPS) without any explanation.
Meanwhile, the economy has ground to a halt and international money markets cut off loans.
The bail-out is not necessarily the end of the crisis.
Until the banks open, no one knows if customers are going to rush in to draw out their cash, further weakening the banks.
Economic spiral
The British government has already suspended state pension payments via Cypriot banks to pensioners on the island. A plane loaded with millions of euros has also landed at a British military base to fund servicemen and their families stationed there.
The property market has collapsed, leaving hundreds of foreign home buyers in financial limbo as victims of fraud by developers and mortgage lenders. Homes are worth a fraction of their price and huge queues are waiting at court doors in cases to decide who actually owns them.
The financial crisis in Cyprus is far from played out – the bailout is merely the end of one episode.
The country has already negotiated a private 10 billion euro loan with Russia to avoid European Union austerity measures. The two bailouts leave Cyprus massively in hock with little or no hope of raising the cash to pull out of the downward economic spiral.
