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Cyprus Financial Sector Faces Darkest Hour

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Cyprus Financial Sector Faces Darkest Hour

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Cyprus is the fifth eurozone nation—after Ireland, Greece, Portugal and Spain—to be bailed out. While the island asked for 17 billion euros to rescue its troubled government and banks, it was only approved for a smaller package, which did not include funds for its financial institutions.

“The deal with the European Union and the International Monetary Fund that emerged on [March 25] grants Cyprus a €10 billion ($13 billion) loan that will not be used for bank re-capitalizations [restructuring],” Der Spiegel stated. “In return, Cyprus will wind down the state-owned Laiki Bank and shift its salvageable components (along with €9 billion of European Central Bank debt) to the Bank of Cyprus. Laiki’s uninsured depositors and bondholders will be wiped out. Bank of Cyprus depositors will also be heavily hit, allowing the country’s debt-to-GDP ratio to remain at a sustainable level that can be brought down to 100 percent by 2020, according to the IMF.”

Banks locked down and would not release funds until government officials devised a plan to raise almost six billion euros as a bailout guarantee. University of Nicosia associate professor Hubert Faustmann told the Guardian it was “the darkest week in Cyprus since the 1974 [Turkish] invasion.”

In response to the crisis “people stormed supermarkets, jammed streets with cars and piled every conceivable product into [shopping carts].”

“‘It may be the very last time I can use this,’ said one man waving a credit card outside Athienitis, a mega-store in [the nation’s capital] Nicosia. ‘We might not have banks next week.’”

Drastic measures (such as 300 euro-a-day withdrawal limits and a 9.9 percent tax on uninsured deposits of more than 100,000 euros) took effect once banks reopened two weeks later. In addition, no one was allowed to leave the island with more than 1,000 euros.

“That amounted to the first so-called capital controls that any country has applied in the eurozone’s 14-year history,” The Associated Press stated.

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