EU’s bailout conditions for Cyprus – How it will affect future bailouts

The world banking sector and the global economy were struck by the biggest news so far in the industry, the bailout deal of EU in Cyprus. It notes that this programme of the EU spares deposits at €100,000, which charges 6.75% of tax on all depositors of banks in the island. This will lead to the closure of Laiki Bank as its €4.2 billion deposits over €100,000 will definitely be put into a bad bank deposit, which only means that these deposits could be lost entirely. It follows that all investments of its lenders will also be lost.

Cyprus Bailout

The so-called Cypriot rescue is regarded as a watershed reflecting how the Eurozone agreements with the failing banks, which compelled the European leaders to commit to the idea of pushing back the risk of bank bailout payments vested to taxpayers and the private investors. The final agreement with regards to the €10 billion bailout only aims to safeguard the country’s prospects although it tends to be hurtful to some, especially to depositors. In fact, the euro as well as the European bank stocks suffered from losses with the primary objective of bank deposit safety in future bailout.

Eurogroup president Jeroen Dijsselbloem believes and predicts that the skittishness of the investors may result in a healthier financial sector as it could possibly increase financing cost for the failing banks. Dijsselbloem believes this approach as a sound economic theory. He contends and encourages people in the industry to think and aim for an instance where direct recapitalization need not to be considered anymore.

The independent financial experts note the significance for both the European Central Bank (ECB) and the Eurogroup to give the bailout hoping that it could be considered an outline for the future bailouts of some countries including Italy and Spain. Mario Draghi, ECB president, warns the emergence of larger systematic risks although Cyprus may just have a small economy.

The bailout rejection of the Parliament results in the country’s approach of turning to Russia to ask for assistance so that its financial sector will not be meltdown. Russia will then be greatly affected if the bailouts were approved. Meanwhile, the European Parliament members are discontented with the proposed bailout conditions. They even criticized the bailouts as it tends to remove the protection guaranteed to the small-scale investors and damage single market as it circumvents the deposit guarantee laws of the European Union.

In line to the issue whether or not the current Cypriot bailout can be a model for future bailouts, many critics and politicians in the Eurozone hopes to see that bank investors and shareholders bear the burden of the crisis and share to its risks. Meaning to say more is at stake when compared to the identification on how to manage the insolvent financial institutions. This could be attributed to the bailout strategy that the EU has been following remembering the Lehman Brothers collapse where taxpayers were assumed to be responsible for the fallout. It only leads failing banks to keep their artificial backing while the creditors and shareholders were spared.

So far, the financial industries have calmly reacted to the bailout conditions set for Cypriot banks. With this, some analyst argue that there is nothing to worry about the implementation of the bailouts. This may not be easy for the European Union leaders to make a resolution for the crisis in euro debt. There are also predictions that this could trigger conflicts with the Eurozone and could possibly affect bailouts in the future. As a result, battle on the financial market, specifically in the banking sector can be waged.

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