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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. |
The Mediterranean island agreed a bailout deal with European authorities and the International Monetary Fund (IMF) at the weekend. | |
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. | |
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. | |
So what could happen to Cyprus now? | |
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. | |
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. | |
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. | |
President Anastasiades warns that Cyprus will also be forced out of the euro, although there is no official mechanism for exiting the single currency. | |
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. | |
On Tuesday, President Anastasiades held talks with MPs aimed at coming up with an alternative plan that may get the parliamentary seal of approval. | |
Further talks with the EU, the IMF and the ECB are scheduled, while the Cypriot finance minister is in Moscow, looking for possible assistance. | |
It was the planned levy on bank deposits that provoked the most anger among MPs and the Cypriot public. | |
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. | |
That would be likely to hurt Russian customers the most. They are believed to hold some 20bn euros of deposits in Cypriot banks. | |
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. | |
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. | |
If Cyprus decides there will be too much opposition to the levy, it may decide to drop it. | |
This would mean finding the 5.8bn euros from another source. | |
One option could be to ask Europe for a more generous bailout package, meaning that less money needs to be raised domestically. | |
Despite the growing resentment in northern European countries against bailouts, the authorities may be amenable to this. | |
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. | |
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. | |
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. | |
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. | |
But an alternative source of money could come from Russia. | |
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. |