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EU tells Cyprus to get a bailout or leave

An employee of Laiki Bank takes part in a protest outside the parliament in Nicosia, Cyprus, on Thursday, March 21.

What happened?

Cypriot banks were heavily exposed to the Greek debt crisis, by virtue of having large bond holdings of Greek debt, both public and private. The value of that debt took a nosedive, destroying the balance sheets of Cypriot banks.

What's the best case scenario?

The best that can be hoped for is that Cyprus takes the hit, gets the money, recapitalizes its banks, and recovers from there. It had a fairly conservative banking sector before the crisis, with deposits far outstripping loans, and its government was running surpluses, so it doesn't have to engage in the kinds of fundamental structural reforms that appear necessary in Greece.

And the worst-case scenario?

The worst-case scenario is that this triggers a run on banks not just in Cyprus (that happened somewhat on Monday) but in other vulnerable countries like Spain and Italy as customers worry that the E.U. will try to impose similar conditions there. Those kinds of runs could lead to a continent-wide crisis of the kind observers have been fearing since the eurozone started its slow-motion collapse in 2009.

Source: The Washington Post

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By The Washington Post
Friday, March 22, 2013, 12:01 a.m.

BERLIN — The euro currency union, a centerpiece European policy for a generation, edged toward a rupture on Thursday when the region's central bank said it was ready to pull the plug on Cyprus.

The stark ultimatum came in a terse statement from the European Central Bank's governing board that on Monday it would cut off the flow of euros to Cyprus' financial system unless the country's leaders reach terms with the International Monetary Fund and other European nations on a bailout.

The IMF and other eurozone countries have offered to lend Cyprus around $13 billion, but expect the country to come up with $7.5 billion on its own through taxes, government spending cuts or other measures to help restart a banking system that is essentially broke. A plan to raise the money by taxing bank deposits — including tens of billions of dollars held by Russians and other foreigners — collapsed earlier this week in the Cypriot parliament.

Because Cyprus is small and its banks aren't so wired into the international system, a failure likely wouldn't trigger the kinds of global problems feared if Greece or another euro nation were to leave the currency union. Still, the uncertain fallout from a Cyprus exit fueled an intense hunt for options — from a nationwide bank restructuring that would put the largest Cypriot banks out of business, to more unusual proposals like mortgaging the property of the Orthodox Church, selling off natural gas rights, or simply asking for donations.

Those details, however, were overshadowed by the larger issues — of a developed world central bank flexing its muscle over a nation's leaders and of the possibility that the eurozone, after years of insisting otherwise, may finally have to admit that its membership is not sacrosanct.

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