Lately everyone is turning their eyes to Cyprus. The small Mediterranean country is the latest victim of Europe’s debt crisis, in which several members of the Eurozone were brought to the brink of bankruptcy by a combination of highly indebted banks and unsustainable sovereign debts. Last month, a troika of the European Commission, the European Central Bank and the International Monetary Fund agreed on a rescue plan in respond to Cyprus' need for a bailout. But the plan has proven to be enormously unpopular in Cyprus. People took to the streets to protest against the bailout and wanted the Troika to go home!

But what makes Cypriot crisis so unique? And since Cyprus is such a small country, why does it matter to the rest of the world? Is the financial crisis ever coming to an end?

Cyprus crisis

Until recently, Cyprus, the birthplace of Aphrodite, had a thriving economy with upcoming tourism, shipping and a huge international banking sector. Its big banks, like others in Europe, attracted large overseas deposits and invested heavily in sovereign debt. Much of the money came from Russia and was invested in Greek bonds. But last month, Cyprus joined Greece, Ireland, Portugal and Spain in the line-up for euro-zone bailouts. The last couple of years Cypriot banks suffered major losses, because of involvement in the financial system of its close neighbour and ally Greece. Cyprus had serious problems with the protection of its banking system against the Greek financial crisis.

Troika bailout plan

The Cypriot government requested a bailout from the European Stability Mechanism on 25 June 2012. Last month, after negotiations the Troika presented the final version of the terms of the bailout for Cyprus. The European Commission, the European Central Bank and the International Monetary Fund agreed on a 10 billion deal with Cyprus. They announced that only the money of depositors with an uninsured deposit of more than 100.000 euros (the maximum guaranteed under EU-law) will be touched.  Plans of the Troika to include account holders with less than 100.000 euros in the bail-in were dropped after protests and lack of parliamentary support in Cyprus. The Troika also announced that Cyprus’ largest bank, Laiki Bank, is going to be closed.

So, for the first time in the Euro crisis, private account holders have to co-finance the bailout. This because, even though the government strongly denies accusations of money-laundering, Cypriot banks have attracted large amounts of capital from sources that can be seen as questionable by the rest of the Eurozone. Member states are not very willing to use their taxpayers’ money on a country to bail out Russian millionaires. But, luckily for the Cypriots, the latest version of the Troika plan is more in line with other debt issues that plague countries in the euro area. Not only uninsured depositors, but also shareholders and bondholders will take losses in restructuring. According to the president of the European Central Bank, Mario Draghi, the debt situation of Cyprus is special and no 'template' for future bailouts.

After a two-week closure, banks in Cyprus went open again with a few capital restrictions. But what are the consequences for the rest of the Eurozone? And for the rest of the world?

Crisis in the Eurozone

The beginning of Europe’s debt crisis started with the U.S. mortgage crisis and the bank failure of the investment bank Lehman Brothers in 2007. What should have been an American dream, became a global nightmare. Today we live in a so called global village. Markets and economies are so inter-connected that hardly any nation has been immune to the crisis. Since 2010, the European Union is dealing with a different form of crisis: a sovereign debt crisis. For some countries in the Eurozone it is difficult or sometimes impossible to repay or re-finance their government debt without the assistance of third parties. As I explained in the beginning of my blog, Cyprus is the latest country in line for such a bailout.

National governments and the European Union have responded to the financial crisis over the recent years. Several domestic and European reform initiatives have been taken and the reform of the EU regulatory financial framework is nearing completion. However, it is a never ending story when it comes to regulation. Because financial markets are mostly subject to national legislation, it is of utmost importance to have several forms of coordination on a European as well as on an international level. This to manage existing debt issues and eventually prevent further crises.

To go back to the case of Cyprus…

It is understandable that people took to the streets after the first plans of the Troika. Cyprus is rescued not only by the EU and the IMF, but also by its own people. They have to carry the burden of the bailout as well. But it is clear that the bailout plan is now much more in line with other debt issues than it was before. So, maybe Troika can stay; to keep on fighting against the domino effect on other member states and most importantly to reach financial stability again!

Because this year’s Centre for Studies and Research will be about ‘The Legal Implications of Global Financial Crises’, the Peace Palace Library will start with a series of library blogs about the crisis. This was the first blog focused on Cyprus and the Eurozone.


Librarian's choice

A selection of relevant publications from the Peace Palace Library collection


Relevant PPL-keywords for further research

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