Cyprus is a small Island country and part of the European Union. This country has been well-known for its tourism and had been thriving in a relatively secure fashion till date. Cyprus also has lax banking regulations which has always attracted outside investment, especially from countries like Russia and Greece.
The problem started with the financial meltdown in Greece. Due to heavy exposure to the Greek Sovereign, Cypriot banks now face insolvency. A large number of Greek organisations have borrowed from Cyprus, drawing heavily on its large deposit amounts. While, it has always been rumored that Cyrus was a hotspot for money laundering through illegal means, the country had a strong banking sector, which was proportionately bigger than its economy. Currently, the banks have been unable to pay their debts due to the Greek financial crisis and partly due to its laid-back attitude towards its fiscal policy.
The European central bank and the IMF have proposed to bailout Cyprus provided that the country can formulate some concrete legislation to prevent another future incident. This clause was undertaken by the EU because of the fact that Cypriot economic crisis could impact EU stability, however small the impact may be. Among the new legislation passed by the Cypriot parliament, it has been proposed that the government will levy a certain amount as a one-time tax on anyone who has an account with a bank in Cyprus. This proposal has caused severe opposition, not only among the Cypriot citizens, but also among foreign nationals who have sunk vast sums into the Cypriot banking sector.
The current crisis has already caused waves in the EU economy, as the Euro fell against the dollar over the week. However, the Euro has bounced back and financial stability seems imminent in the EU. The Cypriot government has been granted a deadline of March 25th to come up with a suitable plan regarding their fiscal policy that will guarantee the bailout from the EU financiers. Already Cypriot citizens have flooded banks and ATMs to see if their funds have been withdrawn to save Cyprus. This has forced the government to declare an emergency closure of all banks until Monday.
If the Cyprus government passes the legislation to levy tax on the account holders, it will result in a great loss for the citizens of this country. However, if Cyprus refuses to tax the citizens and refuse the bailout money, provided by the IMF, it stands to lose its place in the Euro bloc and revert back to its individual currency. This will result in a severe degeneration of the Cypriot economy and may cause the government to build the economy from scratch. Either way, the citizens have a tough couple of years to look forward to.
The only other option is if the Eu bloc extends funds in a friendly way that may not require the heavy tax levy that has been proposed. Already Russia has agreed to extend a loan to the Cypriot government as a symbol of goodwill and has already established that it will continue to be Cyprus’ ally throughout this ordeal. Hopefully, this will soon blow over and the Cypriot government can magically turn this situation into a win for all involved.
Eddie Miller, is a blogger, technologist, trader and the Man Behind BinaryPedia.com.