The contagion clock is ticking over Cyprus crisis

Since Brussels has now become the epicentre of Cyprus’ financial crisis, markets expect that the waves of instability it releases could affect from Greek and Russian banks to the Slovenian economy, to Italian and Spanish risk premiums.

The fact that there is no confirmation over the bank deposit tax plan in sight, as the Cypriot Parliament may not make a decision until later this week, just gives grounds to more fears and rumours. So far, it seems obvious that the country needs more time to cope with the conditions of the rescue.

Cyprus’ president, Nicos Anastasiades, explained what the alternatives were last Friday. Had the government refused to accept Eurogroup’s orders, Anastasiades said, one of the large banks in trouble would have fallen immediately while the second entity would have stopped any activity after the European Central Bank cut liquidity support. The government, which guarantees all bank deposits of up to €100,000, would then need some €30 billion–it does not have them. Losses to bank deposit holders would have risen to 60 percent. Over 8,000 jobs would be lost, too. Thousand of businesses and companies would have been left bankrupt.

Abiding by Brussels rules, though, banks will survive, jobs and companies will be protected, and bank deposit holders will help the economy to recover at an affordable price. They might even make profits, because the percentage taken from their savings is turned into bank shares and these can increase their value.

“We’ll also achieve our goal of reducing our public debt volume to a manageable, sustainable size,” Anastasiades added, “freeing future generations from the responsibility of paying back, so they can keep on with their lives.”

Yet, this so-called “best solution” brings a huge question marked attached to it: how secure are bank deposits in Italy, France or Spain?

Even worse it is that the “best solution” will not be implemented straight away, increasing the chance of contagion within the eurozone. The government has the support of 20 MPs out of 56. The communist party Akel has announced a no vote, and the socialist party Edek will probably follow suit. At least Disy, conservative, the party in office, will vote in favour.

The social reaction will be more unanimous: against the European Union and against the euro.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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