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Inside Story

The cost of saving Cyprus

A bailout was approved to keep the island nation in the eurozone, but is it too high a price to pay?
Last Modified: 26 Mar 2013 09:32

An eleventh-hour deal has been reached to save Cyprus from financial meltdown. International lenders approved a $13 billion bailout package to keep the island nation in the eurozone.

"It's not a defeat and it's not a victory, and I would say it's the first plan of many, because the way … this was handled, the damage to the economy has been so grave, we will definitely miss all our targets, that were demanded by the troika .... We are almost inevitably going for a bailout number two, and that is what is really scaring Cypriots what will it be asked for us to do next time, and that is really undermining the whole principle of the bailing. As someone has said: the operation was a success but the patient died."

Alexander Apostolides, an economic historian

Smaller depositors have been spared this time, but there has still been a high price to pay to keep the banking system from collapsing.

The European Union and the International Monetary Fund had required that Cyprus raise $7.5bn in return for $13bn in international loans. To achieve that they demanded a radical downsizing of its banking sector.

Under the terms of the deal, Cyprus' second largest lender, Laiki or Popular Bank, is to be wound up, and investors with deposits of more than $130,000 risk losing up to 40 percent of their savings. 

The European Central Bank had threatened to cut off crucial emergency assistance to the banks by Tuesday if no agreement was reached.

So is this a painful reality, or too high a price to pay for Cyprus? And will the measures end the island state's financial problems?

To discuss this, Inside Story, with presenter Jane Dutton, is joined by guests: Alexander Apostolides, an economic historian at the European University Cyprus; Marcel Fratzscher, the president and CEO of the German Institute for Economic Research; and Dmitry Babich, a Russian journalist and political analyst. 

"I think the plan is the right one. I think it was was necessary ... the plan should have been implemented week ago ... The time delay has caused great damage. So I fear that the uncertainty for investors abroad and in Cyprus has now increased tremendously with a big cost for Cyrpus. We don't know whether there will be a bank run, depositors will withdraw their money. So I'm quite concerned about the short-run, but the step that has been taken is the right one."

- Marcel Fratzscher, the president of the German Institute for Economic Research

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