How Cyprus’ Bailout Affects Stock Markets and the Euro Zone Crisis

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Almost all newspaper headlines from around the world have these very words screaming at you, ‘Cyprus saved from disaster’. But let not this bold, black and white letters fool you. Cyprus may be saved, although for the moment, but Europe is still very much a boiling hot mess. You might think that staying in the other end of the world keeps you save from the financial crisis of Cyprus, but that actually may not be the case. It is very important to understand the Cyprus financial crisis, Cyprus bailout and its possible effects on the stock market. It is important to also note that the Cyprus bailout may affect the Euro Zone crisis as well. Before we dwell deep into these murky topics, let’s first understand the Cyprus crisis and the bail out in detail.

Background:

Cyprus, a small island nation nestled in between Greece, Syria, Israel, Egypt and other countries, joined the European Union in the year 2004. It adopted the Euro sometime in 2008. Although Cyprus accounts for a bare minimum of 0.2% of European Union’s annual output, it was until recently known as a safe haven in the banking sector. Many rich multinational corporations and Russians reached the banks of Cyprus for many years. The reason for this was the country’s political stability and economic status prior to its sudden collapse.

Cyprus Financial Crisis:

Called as the Cypriot Financial Crisis, it involved Cypriot banks and their reaction to their neighboring country Greek’s Debt Crisis. This was further accentuated by the fact that Cypriot’s economy status was reduced to an abysmally low rating by international rating agencies such as Moody’s and Fitch and S&P. The domino effect of the financial crisis of Greece and Ireland was felt even in Cyprus.

Another reason for the fall in economy was due to the steep fall in its tourism and shipping sectors as well. The Cyprus economy contracted and the rate of unemployment shot up alarmingly, the investors didn’t turn up and the banks were running almost dry. This pushed the economy in to recession.

The Cyprus economy, unlike other economies, is a strange contradiction in itself. The country’s complete economic output is less than 25% of its bank deposits. This disproportion between the countries economy and its banking sector was huge enough to mean that a collapse of the Cypriot banks ultimately had a catastrophic effect on its already fragile economy.

Cyprus Bail Out:

The Cyprus bailout, sealed in the small hours of Monday, aimed at pulling the island nation out of bankruptcy. According to the deal, Cyprus is to receive €10 billion from the EU-IMF officials. Furthermore, all bank deposits amounting to more than €100,000 will attract a one-off bank deposit levy of 6.7% and higher deposits will attract a 9.9% tax. Cyprus’s second most popular bank was closed and all its assets are to be transferred to the Bank of Cyprus. The bailout money cannot be used by the Bank of Cyprus to recapitalize itself. Measures have been put in place to prevent excessive withdrawal or money transfers from the bank as well. Although Cyprus, presently, is sitting pretty on the €10 billion cushion, the deal includes restructuring the complete Cyprus banking structure.

Cyprus banks were closed over the weekend to prevent excessive bank runs. The population of Cyprus has been restricted to using cash transactions only.

Cyprus Deal and its Effects on Stock Market:

Even as many analysts say that the savers would be compensated for any losses they may incur by bank shares, the public don’t seem to be sharing the same enthusiasm. The stock markets around the world seemed volatile after the controversial Cyprus deal. Euro tumbled in Asia trade, falling below its lowest level this year. The Asian Stock Markets were colored red as fears of another recession loomed large. It was not only the Asian Stock Markets that reacted to the Cyprus bailout; European markets fell sharply as well. There were more concerns after key officials suggested that the Cyprus deal would be used as a model to bail out other struggling economies like Slovenia, Malta and Luxemburg.

Cyprus President Nicos Anastasiades said that he had to accept to the bailout deal and to tax bank deposits in order to receive international aid. He went on to say that without the deal the island nation would be reeling under the threat of bankruptcy. In exchange for the €10 billion bailout deal, Cyprus agreed to revamp its banking sector, reduce its budget, increase taxes, implement more stringent economic reforms, reduce withdrawals, retain currency within its borders and privatize many state assets.

This deal has further intensified the eurozone crisis, as the continuation of the present day eurozone is threatened. The crisis can actually also pose a grave threat to Euro to recover any of its potentialities. But when the banks did reopen on Thursday, after remaining closed for nearly two weeks, there was palpable anger and pain among its people. Cash laden trucks were shipped around Cyprus to make sure that when the banks opened, they would be having sufficient funds to manage. Cyprus, for now, seems calm and composed. But when the dust settles down, the Cyprus deal will resemble a jumbled and botched up bailout deal that threatens to engulf the whole nation.

This is a guest post by Mark Bennett of OnlineComcast.com, a site that offers savings and current information on comcast bundle deals.

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