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Play VideoIt’s just a country with a population of 1.1 million but Cyprus has the world’s attention. If its government does not come up with a feasible plan to raise a large sum of money, there will be no bailout and it will most likely have to leave the Eurozone. |
Stocking up on food and protesting in the streets-in Cyprus this weekend, people prepared for the worst as their politicians tried to avoid financial collapse.
By Monday, the government must find seven-and-a-half billion U-S dollars to secure a bailout from international lenders.
Early this weekend, Cypriot leaders said they were close to a package acceptable to the lenders
Michalis Sarris, Cypriot Finance Minister, said, “The majority of the issues on that paper did not call for any further work.”
But big decisions still need to be made. Saturday, Cyprus was considering a 20-percent levy on deposits above 100-thousand Euros at the Bank of Cyprus. A four-percent tax would also hit deposits above one-hundred thousand Euros at other banks.
With that legislation, Cyprus’s days as an offshore banking center would be as good as over.
Jacob Kirkegaard, senior fellow of Peterson Institute, said, “The Cypriot government has no choice. They need to vote with their heads rather than their hearts. Otherwise their banks face collapse.”
Cyprus already passed a sweeping bank restructuring package on Friday. Nine bills included plans to reform its largest bank-Cyprus Popular Bank, also known as Laiki-and to restrict financial transactions in emergencies.
If a final plan is not put into law by Monday’s deadline
Kirkegaard said, “It’s overwhelmingly likely that the ECB will cut off funds. Banks will collapse in a matter of days. The entire Cypriot economy will receive a huge shock.”
The drama is nearing a solution one way or another, and many lessons have been learned-for one, experts say no European Union country will again attempt to tax deposits on the non-wealthy-an initial, but quickly rejected, fundraising plan considered by Cyprus’s government.
Kirkegaard said, “The safety of all E-U depositors has actually increased.”
It was the IMF that demanded Cyprus co-finance a solution. The process has been messy, but experts say the Eurozone will be stronger for it.