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The debt crisis affects Cyprus

This weekend’s news that the island nation of Cyprus is in need of a financial bailout proves the very real concern over economic contagion. In light of the situation there, we can effectively link the Greek bond defaults to the crisis within Cyprus Popular Bank, the most heavily exposed bank in the nation.

“Cypriot banks were pretty much OK all the way up to 2010. They were quite conservative, never lent more than their deposits and never invested in toxic assets. Then they lent money to the Greek government, and those assets became toxic,” Fiona Mullen, an economist at Sapienta Economics, told Reuters last year.

With news of the exposure (CNN reports Cypriot debt-to-GDP ratio is now 87% but is “on course to soar to an unsustainable 140% without a bailout”), the country needs to raise €5.8 billion ($7.5 billion). In an unorthodox move to achieve these funds, the E.U. has proposed a plan to impose a levy on Cypriots: a one-time tax on individual deposits, no matter the size. News of the proposed strategy resulted in a bank run today, fury in the streets and Parliament, who must pass the plan, has delayed a vote until Tuesday, according to the Washington Post.

The proposed one-time tax, though unconventional, should be understood in the context of how Cypriot’s hold their money. There, “bank deposits are eight times the size of the economy, [and] European officials have long felt that low taxes and light regulation have created a money-laundering hub used by affluent Russians,” also reported by the Post. However, many are vehement that an imposed levy sets a dangerous precedent for depositors who have been safe from such excess taxation on insured deposits. George Ugeux wrote in the Huffington Post today, “This is stunning and unheard of: There is no precedent for such a brutal action against bank depositors. It is worse than expropriation, for which there is a quid-pro-quo of fair compensation.”

For more on the financial situation in Cyprus, the New York Times reports on what the levy in Cyprus might mean for countries across the Euro Zone. And see our original 5 things to know about the European debt crisis for an essential backgrounder on the turmoil and crisis within the European Monetary Zone.

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