The fall and rise of Cyprus

Written by group 3: O-P Asikainen and Maria Averina

The Eurogroup finally reached an agreement about the Cyprus stimulus package in March, which may just save the country’s ailing economy. But how did the situation ever get so bad in the first place?

The financial crisis in Cyprus didn’t arrive overnight. The subprime mortgage crisis in United States in 2007 had far-reaching effects on a global scale, which left some economies vulnerable. Cyprus quickly started to head towards a recession, with especially its important tourism industry suffering badly. The country might well have survived its weakening economy and rising unemployment, but then its large offshore banking industry got affected in 2011 by the Greek government-debt crisis, nearly collapsing the banks and sending the whole economy into a nosedive.

The first draft of the rescue plan was made on 16 March, but for many Cypriots and foreign deposit holders it was hard to accept. Cyprus was to receive 10 billion euros worth of monetary aid, but to support its failing banks it would need to implement a bank deposit levy of 6.7 % to even those savings covered by the EU-mandated 100 000 euro deposit guarantee, and 9.9 % for all bigger deposits.

Eurogroup’s solution

On March 25 the Eurogroup managed to settle on the final agreement on how to solve the crisis. The idea to tax any deposits below 100 000 euros was dropped completely, and instead the banks themselves and uninsured depositors have to bear much of the burden. The most troubled bank Laiki was to be shut down completely, and the uninsured depositors in the country’s biggest bank Bank of Cyprus could face haircut as large as 35 %. The Eurogroup, whose earlier suggestion had caused protests among the Cypriots, released a statement stating their full support for the Cypriot people.

On social media many people have expressed their concern, on whether this could happen in Finland. According to the European Commissioner for Economic and Monetary Affairs and Vice president of the European Commission Olli Rehn, people who have money in Finnish banks have no need to worry.

Rehn commented in an interview made by Yle: “If you have less than 100 000 euros in savings, you don’t have to worry especially in Finland.”

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