Cyprus Balks at Bailout

Patrick Baz / AFP - Getty Images

Today, on this International Day of Happiness, few Cypriots have reason to smile.

In what appears to be yet another chapter in the Eurozone's financial mess, the Cypriot parliament on Tuesday overwhelmingly rejected a bailout for the small European nation's financial sector, an unsurprising reflection of the public's outrage with the bailout package. The troika's--a triad of international lenders comprising of the European Commission, the European Central Bank and the International Monetary Fund--unprecedented proposal to tax bank deposits on account-holders in Cyprus met fierce public outcry, as pictured above. Cypriot officials seek €10 billion (roughly $13 billion) to help alleviate illiquidity and revive the country's banking sector. Remarkably, the much sought after bailout package represents more than half of Cyprus' €18 billion economy, pointing to the severity of the present crisis.

Analysts point to Greece's financial woes as a central explanatory component of Cyprus' current   financial bind. Cyprus has been a major buyer of Greece's public and private debt. When Greece's debt crisis hit its apex in 2011, the value of Greek bonds, and therefore the value of Greece's debt in Cyprus, plummeted. Now faced with worthless bonds and strapped for cash, some Cypriot banks have limited how much money can be withdrawn from their clients' accounts and have put increasing pressure on parliament to act. The recent bailout proposal's rejection spells victory for citizens of Cyprus, who rightly question the intrusiveness of taxing their bank deposits, yet raises uncertainty for the country's--and the Eurozone's--future fiscal health. Many European officials are worried that a botched bailout in Cyprus could lead investors to flee from other financially-unsound states, such as Spain and Italy.

Inspired by the Cypriot parliament's refusal to sign the bailout deal, Greek opposition parties have come forward to loudly denounce these aid packages and the ineffectiveness of several rounds of austerity, which were imposed by international lenders. Outside of the Eurozone, even Russian President Vladimir Putin has criticized the bailout package, as Russian citizens have used Cypriot banks as a tax haven for more than $30 billion worth of bank deposits. More broadly, the bailout package's provision to tax bank deposits reflects the Eurozone members' inability (and reluctance) to financially aid one of the EU's own. Put another way, citizens of and account holders in Cyprus are being asked to directly finance the bailout, as opposed to the alternative route of raising general taxes and scaling back public services. As of now, it is unclear how Cypriot officials and international lenders will reconcile and (hopefully) place Cyprus on the road to recovery before the situation gets worse.

Austerity in one form or another will always be politically undesirable and illicit public outrage. The recent outcry in Cyprus in response to the proposed bailout reflects this. However, with limited options and time working against it, Cyprus will be forced to make some tough fiscal decisions. Even with the acceptance of a bailout, investor confidence and investment activity in other debt-ridden European economies will depend on this package's success. 

Fingers crossed?