Recent financial news has been dominated by the Cyprus Financial Crisis which yet again has threatened to spill over into the Eurozone and potentially beyond if the debt crisis spreads to other European countries. While the previous debt crises afflicting Greece, Spain and Italy appeared to be on the backburner, the Cyprus affair had its roots absolutely in Greece as Cypriot banks had lent money to its Mediterranean counterpart and, once the Greek economy had gone into freefall, had purchased Greek government bonds anticipating a bailout. Consequently Cyprus’ banks now owe more money than the entire island’s GDP.
A Eurozone Problem
Faced with the potential collapse of the Cypriot economy, Eurozone countries were not exactly thrilled with the prospect of having to bail out yet another partner – in part due to Cyprus’ unique position as a tax haven for wealthy Russian oligarchs, companies and even the occasional underworld criminal who had deposited large amounts of cash in Cypriot banks. Fearing the alternative solution – the taxation of personal savings, many of which are owned by foreign nationals now residing on the island in their retirement – Cypriot banks were flooded with savers keen to withdraw as much cash as they were permitted and even the government’s promise to protect people’s savings in the event of a banking collapse appeared to be as shaky as the Cypriot economy.
However, the Cypriot legislature has voted against passing a law to tax individuals’ savings at a rate of between 6 and 10 per cent and a 10bn euro bailout from Eurozone countries has been agreed; only savers with in excess of 100 000 euros face being affected by higher taxation.
Will the contagion spread?
While a rescue package has been agreed, at least in the interim, the longer-term consequences of the Cyprus Financial Crisis have yet to be witnessed, with some commentators earmarking Slovenia as the next country facing financial ruin. Furthermore, if the Eurozone debt crisis spreads, investors both within Europe and beyond may withdraw savings from banks rather than risk facing further losses, the consequences of which could be significant.
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