Don’t look now, but Cyprus is slowly creeping back into the limelight.
Cyprus’ president, Nicos Anatasiades, sent a letter to euro zone leaders asking that the country’s bailout terms be restructured. According to him, the measures imposed on Cyprus’ two largest banks were imposed “without careful preparation.” Consequently, this had led to Cypriots barely having enough capital to go around. Yikes!
Remember that in March earlier this year, Cyprus agreed to a bailout deal with the Troika. It involved closing down the country’s second largest bank, Laiki Bank, and restructuring its biggest bank, the Bank of Cyprus. In exchange, the government got a 10 billion EUR.
It’s probably the most controversial bailout deal to date. Cyprus had to agree to having depositors who had more than 100,000 EUR in their accounts shoulder a portion of the bailout.
One has to wonder though, whether the bailout deal has actually done more damage to the country.
Experts believe that with all the changes to the financial sector (such as capital controls) and the austerity measures, Cyprus could spiral further into recession. Official forecasts predict that the economy could shrink by another 8.7% this year but some are saying it could be much worse, considering the government’s exposure to some of Cyprus’ banks.
Looking back though, it wasn’t like Cyprus had much of a choice. Had the government not agreed to the terms handed down to them from the Troika, banks would not have had access to liquidity from the ECB. This would have locked up the flows to capital in the economy and most likely force them to get kicked out of the euro zone.
The question is, what can Cyprus do now?
With options limited, Anastasiades actually asked for additional funds on top of the 10 billion EUR that was granted last March. He requested that part of the emergency funds be converted into long-term bonds. This would effectively help bring down current costs to help ease the pressure on the government.
To be clear though, the government isn’t abandoning the current bailout deal. It is simply asking for the Troika to help them out by cutting them some slack. For now though, all Cyprus can do is wait and hope for the best.
Just be sure to keep the debt-ridden country at the back of your head when you’re trading the euro in the next few days. Back in March, talks about a potential Cypriot default haunted the markets and sent the euro lower. I wouldn’t be surprised to see the same thing happen this time around!