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Cyprus crisis: What happens next? Cyprus crisis: What happens next?
(about 20 hours later)
Cyprus, one of the smallest members of the European Union, has become the latest high-profile casualty of the long-running eurozone crisis.Cyprus, one of the smallest members of the European Union, has become the latest high-profile casualty of the long-running eurozone crisis.
Like Greece, Ireland and Portugal before it, the Mediterranean island has agreed a bailout deal with European authorities and the International Monetary Fund (IMF). But unlike those other nations, it is asking savers to pay some of the costs. The Mediterranean island agreed a bailout deal with European authorities and the International Monetary Fund (IMF) at the weekend.
That has sparked anger among Cypriots, and Cyprus's government is now rushing to renegotiate the deal before a parliamentary vote and amid widespread uncertainty at what the impact of the Cyprus crisis on the wider eurozone might be. But on Tuesday, Cyprus's parliament voted to reject the deal, which would have taken a percentage of people's bank savings to raise 5.8bn euros towards the bailout.
So what might happen next? That has left Cyprus in crisis. If it fails to agree a bailout, its President, Nicos Anastasiades, warns the country will default, the banking system will collapse and it may be forced to exit the euro.
The parliamentary vote has been repeatedly delayed and the banks have been shut while Cyprus's government discusses changes to the bailout deal, including a plan to drop a 6.75% levy for savers with less than 20,000 euros in their accounts. So what could happen to Cyprus now?
It is possible those changes may assuage some of the public anger towards the bailout deal, allowing parliament to vote it though. Perhaps the worst-case scenario is that a bailout deal is not agreed and Cyprus will essentially declare itself insolvent, and its banking system will collapse.
Even if a renegotiated deal doesn't convince the Cypriot public, parliament may feel it has little option but to push the deal through. Cyprus's government cannot afford to bail out its banking sector, and international investors are refusing to lend to it, so without a bailout, it cannot pay off its debts.
Cypriot President Nicos Anastasiades has warned MPs that a no vote could leave Cyprus bankrupt and force its exit from the eurozone. Furthermore, Cyprus's two biggest banks are reliant on the European Central Bank (ECB) for emergency funding to keep them afloat, and the ECB has let it be known that this funding is contingent on a bailout plan being implemented.
But the relatively small size of Cyprus's economy and the limited exposure of other European banks to Cyprus means investors are less concerned about "contagion" - the spread of Cyprus's problems to the wider eurozone. President Anastasiades warns that Cyprus will also be forced out of the euro, although there is no official mechanism for exiting the single currency.
Even if a deal of some kind is voted through, there may be longer-term effects on Cyprus and the eurozone. The impact of a default for the wider eurozone is unclear. Investors suggest the relative small size of Cyprus's economy means the "contagion" risk is low, and the crisis has yet to unsettle European markets.
Domestically, any agreement that requires Cypriots to give up a percentage of their bank balances is likely to provoke anger against the government. On Tuesday, President Anastasiades held talks with MPs aimed at coming up with an alternative plan that may get the parliamentary seal of approval.
That government may then struggle to impose the austerity measures that the EU and IMF are also demanding on an already-dissatisfied public. Further talks with the EU, the IMF and the ECB are scheduled, while the Cypriot finance minister is in Moscow, looking for possible assistance.
Austerity measures in Greece and Spain have already provoked civil unrest. It was the planned levy on bank deposits that provoked the most anger among MPs and the Cypriot public.
More widely, the Cyprus bailout has already raised questions about European authorities' handling of the eurozone crisis. But unless the government can find another way of raising that money, they may have to stick with the levy - but perhaps charge those with the biggest bank deposits more.
The Cyprus deal is unprecedented - previous bailouts have made governments and big investors pay when banks or governments become insolvent, but people's personal bank accounts have always been protected. That would be likely to hurt Russian customers the most. They are believed to hold some 20bn euros of deposits in Cypriot banks.
Specifically, it may shake confidence in the EU's handling of the eurozone crisis and spark concerns about its ability to announce unprecedented measures whenever a new country gets into trouble. European creditor countries such as Germany would support this, as they are feeling political pressure to reduce the amount they spend bailing out their southern European neighbours.
Some analysts have warned that the deal sets a dangerous precedent, and may cause runs on banks in other countries, where savers worry that their bank accounts may be plundered should their economies get into trouble. This may have a wide impact on the eurozone, however. Some analysts have warned that bank customers in other European countries may begin to fear that their savings will also be targeted, should their economies run into trouble.
Perhaps the worst case scenario was outlined by Cypriot President Nicos Anastasiades, who warned that failure to agree a bailout would lead to the government becoming insolvent, a collapse in the banking sector and the country exiting the euro. If Cyprus decides there will be too much opposition to the levy, it may decide to drop it.
President Anastasiades said it became apparent during negotiations that, if a deal was not agreed, the European Central Bank (ECB) would cut the emergency funding that is keeping Cyprus's two biggest banks afloat. This would mean finding the 5.8bn euros from another source.
There is no formal mechanism for leaving the euro, so it is not clear how that would happen, but Cypriot politicians clearly see it as a very real threat. One option could be to ask Europe for a more generous bailout package, meaning that less money needs to be raised domestically.
The make-up of parliament gives President Anastasiades only a slim majority, and any vote is likely to be close. Despite the growing resentment in northern European countries against bailouts, the authorities may be amenable to this.
An alternative course of action is that Cypriot politicians, keen to avoid a disastrous default, will vote down the plan but return to the EU and IMF and ask for a more generous deal. The bank deposit levy is unprecedented in eurozone bailouts so far and there is widespread concern that European authorities made a big mistake in insisting on it. They may be prepared to row back.
This could involve increasing the size of the bailout from its current size of 10bn euros, reducing the need to raise money from people's bank accounts, for example. It is also helped by the small size of the current Cyprus bailout (10bn euros) compared with Greece's two bailouts, for example, which totalled 240bn euros.
This may be possible, given the small size of the Cyprus bailout compared with Greece's two bailouts which totalled 240bn euros. A more generous EU deal could come with more onerous austerity measures, however. Given the resentment already present among Cypriots, harsh austerity measures may be difficult to push through.
However the willingness to compromise will depend on the mood of creditor countries like Germany, where public opinion is already against bailing out their southern neighbours. If Europe refuses to offer any more money, Cyprus could try to raise cash through measures like nationalising its pension funds - a move that could raise 3bn-3.5bn euros.
Russia has already lent Cyprus 2.5bn euros and Russians are believed to hold some 20bn euros of deposits in Cypriot banks. But an alternative source of money could come from Russia.
Its leaders have protested about not being involved in the bailout negotiations, but it remains to be seen if they will play a greater part in helping the Mediterranean island out of its current troubles. Russia has already lent Cyprus 2.5bn euros and Russian depositors hold large amounts of cash in Cypriot banks.
Its leaders have protested about not being involved in the bailout negotiations, and they are angry that Russian customers will be targeted by the proposed levy of deposits.
MPs have voiced concerns that agreeing to the European deal would drive Russian customers - a crucial source of income - away from the island.
Cyprus's Finance Minister, Michalis Sarris, has been in Moscow for emergency talks, but there has been no agreement so far.
One possible plan is that Russia could take big stakes in Cypriot banks in order to prop them up, or offer another loan.