Q: Why does Cyprus need a bailout?
A: Before the financial crisis Cypriot banks grew rapidly, lending large amounts of money to borrowers in Greece – and buying significant chunks of Greek government debt. Two years ago the IMF estimated Cypriot banks’ combined assets were more than seven times larger than Cyprus’s entire GDP. When Greece went into freefall and imposed a ‘haircut’ on its creditors, Cyprus took a big hit.
Q: So why didn’t the government just nationalise the banks, like we did with Northern Rock?
A: Precisely for the reason above. Cyprus was affected by the economic slowdown like everybody else, and its government could not afford to buy them out. The markets also saw its exposure to Greece and raised its borrowing costs accordingly.
Q: So why does the EU want to make Cypriot savers pay?
A: Bailouts always come with strings attached, be they tax rises, austerity – or in this case, a tax on savings. The deal would require anyone with more than €100,000 in savings to pay almost 10 per cent, and anyone with less to pay 6.75 per cent. This was agreed due to the huge amount of deposits in Cypriot banks being from overseas clients – in many cases from dubious Russians suspected of money-laundering. Unfortunately for ordinary Cypriots, they’ve been hit too.
Q: What happens if Cyprus votes against the deal?
A: It’s not certain. Either the conditions are eased, or Cyprus defaults on its debts, leaves the euro and looks for other sources of finance – which, ironically in this case, may be Russia.