Cyprus out of doldrums with $13 billion EU barter

Northern, WI 03/25/2013 (avauncer) - Cyprus averted a major financial catastrophe when Nicos Anastasiades, the Cypriot President announced that the largest bank in Cyprus will be shut down. This decision has saved the country from disorderly default and salvaged it from being exited from the Euro currency. In exchange for agreeing to downsize its banking system the country will receive a bailout of 10 billion euro from the EU. Cyprus has been in the midst of debt crises and the markets have been shaken up very badly. Olli Rehn, the European Union Economic and Monetary Affairs Commissioner said they had no real options and hard choices were the only options before them.

Second attempt
This is the second instance in nine days that the crisis-struck country has struck a deal with the International Monetary Fund and its creditors and the week has been a very stormy one. March 16 saw the first accord being reached and it also crashed just three days later. This was post the rejection of a tax on all the banks in the country, by the parliament. Greece was the fist country to fall prey to the crisis in 2009 and Cyprus with the third-smallest economy in the euro area has now become the fifth in line to ask for assistance from the EU. News of the agreement saw the euro rising to $1.3033 by 0.3 percent.

No hasty decisions
The government owns 84 percent of the Cyprus Popular Bank and it will now be winding down operations. Senior creditors, bond holders and uninsured depositors are the ones who will be pulled into the wake. However, the senior bondholders will be contributing to the Bank of Cyprus recapitalization plan. All banks in Cyprus have been shut for the last week and will remain that way until further notice. Cypriot lawmakers will be imposing capital controls to ensure that there will be no run on deposits once they reopen. European governments had been struggling with the Cyprus aid for almost nine months and had exposed shortfalls in the economic management system that had undergone a change.

Shoddy planning
This system had come into form over a period of three years of policymaking that was almost always conducted on an emergency basis. The rot in Cyprus continued to spread despite the fact that Europe was pulling in the reins on budget-deficit restrictions. The new rules that had been set in place to penalize those countries that had highly shaky economies were in vain. Russia has close to $31 billion worth of holdings in Cypriot banks and bank seizures may bring Russia on edge.