March 20, 2013

Yesterday, the parliament of Cyprus rejected a one-time tax on bank deposits, proposed as part of €10-billion ($13-billion) European Union (EU)-International Monetary Fund bailout package. The vote was 36 against the proposal, with 19 abstentions. No member of parliament voted in favor of the bill. The one-time tax included a levy on bank deposits smaller than €100,000 ($129,500). It was to have raised €5.8 billion ($7.5 billion), which would have boosted the EU bailout fund to nearly €16 billion ($20.5 billion). EU finance ministers have warned that Cyprus’s two largest banks will collapse without the bailout.

Cyprian banks are holding huge numbers of Greek government bonds, which have lost about 50 percent of their value as part of Greece’s bailout agreements with the EU. The banks have also made loans to both the Greek and Cyprian private sectors, which are likely to go unpaid with both countries’ economies in deep recession. European banking analysts estimate that Cyprus’s two largest banks are undercapitalized by as much as 60 percent of total deposits. That is, the banks do not have enough money to fully pay all their depositors.

The euro has replaced the individual currencies of 17 member nations of the European Union. (European Central Bank)

European officials fear that if Cyprus does not find the funds to prop up the banks, the country itself will be at risk of economic collapse. They note that there is a clear risk that Cyprus will pull out of the eurozone, which would likely trigger a chaotic situation for the remaining 16 countries that use the euro.

Additional World Book articles:

• Crisis in the Eurozone (a Special Report)
• Economics, World 2010 (a Back in Time article)
• Economics, World 2011 (a Back in Time article)