Deadline looms for Cyprus deal

Currencies Direct March 22nd 2013 - 2 minute read

The banking crisis in Cyprus has
drawn headlines this week, sending the euro on a downward
trajectory
and causing concerns of a collapse.

Thursday, March 21st, was set as
the initial deadline for reaching a solution, and banks were closed
to avoid a run. However, leaders are still unable to agree on the
best approach and the deadline is creeping ever closer.

Proposals for a tax on residents’
savings has been rejected, but Cypriot lawmakers now have a
deadline imposed by the European Central Bank of three days to
secure bailout funds and prevent a financial collapse.

All eyes are on Nicosia as he
rushes to identify a plan B that is acceptable both to Brussels and
to the Cypriot lawmakers.

Crucially, the plan cannot involve
any more lending and relies on Cyprus raising the 5.8 billion euros
to trigger the emergency loans as soon as possible.

This morning German Chancellor
Angela Merkel criticised the country’s economic reliance on the
financial sector.

“It must realise its current
business model is dead,” she said

There was optimism early on Friday
(March 22nd), that a deal would be struck with Russia to aid Cyprus
and ensure the future of the country.

As a financial collapse in the
country would put billions of euros owned by Russian citizens at
risk, a financial agreement between the countries seemed like a
likely solution.

“There is cautious optimism that in
the next few hours we may be able to reach an agreed platform so
parliament can approve these specific measures which will be
consistent with the approach, the framework and the targets agreed
at the last Eurogroup,” Averof Neophytou, deputy leader of
President Nicos Anastasiades’s Democratic Rally, told
reporters.

According to Reuters, Russians were
believed to account for the majority of the €19 billion of non-EU,
non-bank money held in Cypriot banks in January, against a total of
€70 billion in non-bank deposits.

However, Cypriot Finance Minister
Michael Sarris failed to renegotiate a 2.5-billion euro loan from
the Russian government or secure new investment from the
country.

As a result, the Bank of Cyprus is
now urging the government to make a deal with the EU over the plans
to tax the savings of citizens, suggesting that the deal would be
preferable to the collapse of the system and the erosion of all
euro assets if the country returned to the Cypriot pound.

Unsurprisingly, given the nine per
cent tax on savings over €100,000 and 6.5 per cent on anything
below, Cypriots are unhappy about the plans.

Russian president Vladimir Putin
quickly lambasted the deal, insisting that as so much Russian money
is at risk, the country should have been consulted over the
plans.

David Cameron, meanwhile, spoke out
to guarantee the savings of British Armed Forces personnel and
civil servants posted to the island. Earlier this week €1 million
was flown to the country to protect troops and their families in
case cash machines stop working.

Nevertheless, if Cypriot lawmakers
do impose the measures to tax savings, and the deal goes ahead, it
has potentially damaging ramifications for the trust of banks
throughout Europe and the safety of cash assets.

Written by
Currencies Direct

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