In a rare move, Cyprus is trying to raise around 5.8 billion euros ($7.5 billion) from a one-time bank charge on local deposits. Unlike in other European countries, local banks only have a small amount of outstanding bonds, which have their own set of legal complications. So the Cypriot government was unable to require the banks’ creditors to take major losses to finance the bailout.
“Authorities have taken a calculated risk. If the problem escalates, the entire euro zone banking system could implode,” said Cormac Leech, a banking analyst at Liberum Capital, in London. The deposit levy “shows that it’s O.K. to break the rules. Politicians are betting that they won’t have to do this again.”
In other struggling countries, bondholders would likely be the first to feel the pain.
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