Eurozone finance ministers finally agreed to grant a €10 billion bailout to Cyprus to prevent its banking system from collapsing and keep the nation in the Eurozone after the Cypriot government surrendered to the demands of its debtors.
As part of the deal the second largest Cypriot bank, Laiki, is being closed. Losses from its closure, will be substantial, estimated at billions of Euros and will be absorbed by holders of its bonds and those with deposits over €100,000($130,000; £85,000).
In one stroke, one important source of credit to the economy will be eliminated.
There is some relief for those with savings of €100,000 or less, because their cash will be transferred to the Bank of Cyprus, the country’s biggest bank, and kept intact. However, the Bank of Cyprus too is being reconstructed with the costs of making sure it has enough capital to operate safely in the future will also fall on deposits greater than €100,000. So these depositors too will incur losses running to billions of Euros.
Gary Jenkins of Swordfish research told the Guardian newspaper; “This is just the beginning of their problems. They’ve stopped the old business model of attracting deposits from wealthy individuals, but it hasn’t been replaced with anything else.
‘Regarding the bailout they are never going to see that €10bn back. The economy is crushed for the next God knows how many years. As soon as people can take their money out of the banks, they will take it out. If I’ve €10,000 in the Bank of Cyprus, why would I leave it there?
‘Anyone’s guess would be that the economy is going to crash in these circumstances. Confidence has disappeared. What is the impact on Cypriot companies? Has no one looked at how many corporations have over €100,000 in the bank? Who’s going to want to do business with Cypriot corporates right now? The deal is a nuclear bomb to crack a nut. If you’re worried about money laundering go after money launderers. Don’t go after Cypriot nationals.”
As a result of the deal other smaller EU nations such as Luxembourg, Slovenia and Malta must be extremely nervous that what occurred in Cyprus can happen in their countries as well. Each has an outsized financial sector and each is vulnerable to contagion. The decision to go after depositors with over €100,000 has still raised the likelihood that a bank run will occur across the region.
Spain and Italy could see investors withdrawing their cash, for example if you’re a US company why would you want your funds in those country’s banks. , US politicians have been talking about how to get the money back from overseas. No non-Italian and non-Spanish companies are going to keep their money there.
The Russians have revealed that they are unhappy with the deal with Russian Prime Minister Dmitry Medvedev reacting furiously to the bailout deal. He said; “In my view, the stealing of what has already been stolen continues.”
It is unclear whether the Russians will retaliate; rumours have circulated that they could freeze German assets in the country.
As a result of the deal the Euro briefly made gains before beginning to slide on renewed fears of what will happen when Cypriot banks reopen.
Current Euro Exchange Rates
As of 11:30 am
The Euro to Pound Sterling exchange rate is currently trading in the region of 0.8538
The Euro to US Dollar exchange rate is currently trading in the region of 1.2988
The Euro to Australian Dollar exchange rate is currently trading in the region of 1.2400
The Euro to New Zealand Dollar exchange rate is currently trading in the region of 1.5523