In the early hours of this morning a deal was finally thrashed out to save Cyprus from bankruptcy. Although the details have yet to be fully announced it is understood that key proposals include the closing of the Island's second largest bank, Laiki. Investors with less than euro 100,000 will be fully protected from loss, but larger deposit holders can expect to lose significant sums of money. It is not yet clear what the impact will be on large deposit holders in other banks.
It is understood that the deal does not require the approval of the Cypriot parliament as the losses to be suffered by deposit holders will not be in the form of a tax, unlike the controversial proposals unanimously rejected by its politicians last week.
Although Cypriots will undoubtedly be breathing a sigh of relief that their economy has been saved from bankruptcy at the eleventh hour, there will be ongoing repercussions from this episode. Cypriots have been voicing a deep anger with the EU in general and with Germany in particular, over the hard line that they have taken on bailout conditions. Feelings are running so high that a majority of Cypriots are now said to favour leaving the EU. Meanwhile, the Russians (who represent a significant proportion of the Island's major depositors and who will therefore bear the brunt of the cost of the bank restructuring) will doubtless be very angry, and have even been reported as threatening economic reprisals against Europe.
The Spaniards, Portuguese and Greeks will be watching their own bank deposits carefully over the coming days to see whether nervousness over the losses inflicted on deposit holders in Cyprus infects those with savings in other troubled European economies. A flight of cash would be disastrous for those countries still struggling with the effects of a deep recession and high unemployment.
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