Cypriot Bailout Deal Could Be Too Little Too Late

 
on March 25 2013 8:02 AM
Cyprus bank line
People queue up to make a transaction at an ATM outside a branch of Laiki Bank in Nicosia March 21, 2013. Cypriot politicians searched desperately on Thursday for a "Plan B" to find billions of euros to clinch a European Union bailout and avert a financial meltdown after parliament rejected a bank deposit levy. Reuters

The euro rebounded on Monday and traded at 1.3005 at 9:33 GMT after eurozone officials reached a last minute deal on Cyprus bailout terms.

Last week, the common currency was under heavy pressure as many speculated that Cyprus would exit the euro after the tiny island nation rejected the initial terms of its bailout.

The new terms dictate that one of Cyprus' largest banks, Cyprus Popular Bank PLC, will be shut down and accounts of over 100,000 euros will face losses. The Bank of Cyprus, the largest bank in the country, will also be downsized at the expense of large accounts.

Although a deal has been reached, many believe the long term damage has already been done, and that the nation will have to impose strict restrictions on money transfers in the coming weeks.

Wealthy depositors from countries like Russia have long used Cypriot banks to store cash because of the country's lenient banking laws and low corporate taxes.

A eurozone breakdown has been avoided but the euro will be under pressure in the months to come as investors pull their money from Cyprus and surrounding countries. However, the terms of the new deal were not met with open arms; the Wall Street Journal reported that President Nicos Anastasiades threatened to resign on Sunday evening amid calls for a comprehensive restructuring of Cypriot banks.

Cyprus has become an offshore tax haven over the past ten years, which has been a source of tension between Cypriot lawmakers and eurozone officials. Restructuring the country's banking sector is likely to have dire consequences, as nearly half of its economic activity comes from financial services.

The new bailout agreement may be too little too late, as many believe the long term damage has already been done and that the nation will have to impose strict restrictions on money transfers in the coming weeks to keep account holders from quickly withdrawing all of their money when the banks reopen.

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