by Gabriele Steinhauser
Wall Street Journal
March 18, 2013
What’s the stand-off between Cyprus and the euro zone all about?
After an all-night emergency meeting with the euro zone and the International Monetary Fund, Cyprus announced Saturday morning that it would impose a tax on deposits in return for a €10 billion bailout. Deposits below €100,000 were to be taxed at 6.75%, those above at 9.9%, raising a total of €5.8 billion. The levies, especially those on small savers have created a political backlash in Cyprus and beyond. On Monday, euro-zone finance ministers said Nicosia could change the rates as long as it could still raise €5.8 billion. A bill sent to the Cypriot parliament Tuesday kept the agreed levies, but would exempt accounts with less than €20,000, creating a €300 million shortfall. But Tuesday night the Cypriot parliament rejected a bill that would have spare accounts with less than €20,000 and raised only €5.5 billion, putting the entire bailout deal into question.
What happens if Cyprus can’t get Parliament to agree on the levies?
The euro zone and the IMF could agree to give Cyprus a larger bailout, but they believe that a bigger aid package would push the island’s debt too high. If Cyprus can’t secure a bailout, its banks would quickly collapse as depositors pull out their money and the European Central Bank pulls liquidity support. The government would likely default on a big bond redemption on June 3.