Why Cyprus matters, and how it can rattle the world's markets


Cypriots protest outside the parliament building in Nicosia, on March 18, 2013. Cyprus President Nicos Anastasiades was seeking the backing of MPs for an EU bailout deal that slaps a levy on bank savings under harsh terms that have jolted global markets and raised fears of a new eurozone debt crisis.



Global markets rumbled and the euro tumbled Monday on the news that Cyprus' parliament had delayed an emergency vote on a bailout plan for the second time in two days.

President Nicos Anastasiades warned that a failure to pass the $13 billion deal could lead to "a complete collapse of the banking sector," while Cypriots reportedly scrambled to withdraw money from ATMs during a banking holiday.

So what do we know about the country that caused economic ripples worldwide?

Cyprus is an island in the Mediterranean Sea with an area of 9,251 sq km (or, as the CIA World Factbook notes, about 0.6 times the size of Connecticut).

The tiny country has been divided between Turkish Cypriots and Greek Cypriots since 1974, with 77 percent of the population being ethnically Greek, 18 percent Turkish and 5 percent other.

More on GlobalPost: Cyprus tax on bank deposits sends global markets plunging

Cyprus adopted the euro on Jan. 1, 2008, but as the BBC noted, its extensive exposure to Greece's recession-hit economy weakened its own economy, forcing it to seek emergency help.

The reason that such a small country has sparked economic rumblings across the world markets is the precedent being set in the bailout deal: One of the terms of the bailout would place a 10 percent "tax" on the money depositors have in the bank, to be removed before the banks re-opened this week.

It comes down to a question of trust, as Sebastien Galy of SocGen told Business Insider:

It breaks a cardinal rule, namely public trust on which money relies. Had they thought their savings were at risk from a restructuring, savers would have run on local banks, hence it is different from a tax.

Michael Hewson, a senior market analyst at CMC Markets UK said, according to The Wall Street Journal:

If European policymakers were looking for a way to undermine the public trust that underpins the foundation of any banking system they could not have done a better job.

As The New York Times noted, the precedent set in the Cyprus bailout has raised fears that Spain and Italy may face similar terms on taxing their depositors.

Jeroen Dijsselbloem, the president of the group of finance ministers from 17 countries in the eurozone, did not rule out the tactic in countries besides Cyprus, but he did say it was not currently being considered.

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