Cyprus Rejects Bailout Terms and Turns to Russia for Help

By Roger Baettig | March 20 2013 8:19 AM

The euro edged upward to $1.29 on Wednesday morning after Cypriot leaders turned down the European Union's bailout terms and began talks with Russia to secure financing on past loans.

Reuters

Protesters shout slogans during an anti-bailout rally outside the parliament in Nicosia March 19, 2013.

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Cyprus' vote is the first time any nation has rejected EU conditions for aid. Within the past three years, Greece, Ireland, Portugal, Spain and Italy all gritted their teeth and imposed painful and often unpopular austerity measures in order to access the EU funds.

However Cyprus' terms have sparked controversy among investors across the globe as its implications could reach further than the tiny island nation by becoming a precedent.

The original terms stated that the country would need to raise nearly six billion euros by imposing a levy on banks and essentially paying for debt using individual bank accounts. Large accounts would be taxed almost 10 percent, while smaller accounts under 20,000 euros would be exempt.

After the levy was rejected without a single supporting vote, Cyprus' government began to work with the European Central Bank to renegotiate the terms. According to Reuters, Cypriot officials are requesting that the ECB reduce the 5.8 billion euros they are required to raise in order to make the banking levy less painful for investors.

Many will be watching for whether or not Cyprus will reopen its banks as planned on Thursday after they were closed in an effort to keep account holders from withdrawing all of their savings.

Finance Minister Michael Sarris told reporters he was working with Russian leaders to extend an existing 2.5 billion euro loan that is set to mature in 2014 and reduce its interest rate. While the two nations have not come to any agreement yet, both sides say negotiations are still on the table.

Moving forward, markets will be on edge watching for the outcome of the tiny island's financial woes. Austrian Finance Minister Maria Fekter has said the ECB is only willing to help Cyprus if they come to a reasonable agreement about how to sustain the country's debt.

According to Fekter, the Cypriot banks will not receive any more cash until the terms are agreed to.