Eurozone faces new risks amid $13 billion Cyprus bailout

April 19, 2013 at 6:05 PM
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BRUSSELS, April 19 (UPI) -- The European Union faces new risks to its 17-member eurozone as a $13 billion bailout of Cyprus failed to calm fears, exacerbated by a Fitch downgrade of Britain.

Investors warned Europe in and outside the eurozone faced dangers similar to Latin America's sovereign defaults, state confiscation of deposits and other multiple crises of the last century which carried into 2002 in parts of that region.

The bailout has pitted Cyprus against new political challenges and several eurozone countries against national parliaments, which must approve their participation in the bailout.

Despite European Commission assurances the bailout would help Cyprus overcome the crisis, the island's political establishment faces new turmoil. EU officials hope an accord on the bailout will be signed this month and cash transfers to Cyprus will begin by mid-May.

The deal promises Cyprus the first tranche of the loan from the eurozone and the International Monetary Fund by next month. The Cypriot political scene is deeply fraught, however, and parliamentary approval is likely to see repeat of furious protests during a March debate.

As part of the deal Cyprus needs to raise $17 billion to qualify for the EU-IMF loan, another sensitive issue for Cyprus, which has been stripping state assets at home and abroad to meet terms of the rescue package.

Depositors in several Cypriot banks are set to lose huge chunks of their deposits, EU data indicated. Taxes are also set to rise further, and many welfare programs will disappear, including those run by churches, which have lost millions held in banks due to the restructuring and rescue package.

Expert warnings of a sharp contraction of Cypriot economy are already in place, with predictions of up to 9 percent shrinkage but new fears are focused on a potential new slump in Europe.

There are fears too that Italy may be next in line with a deeper crisis, partly because it has failed to pick a new government. The Italian economy, the third largest in Europe after Germany and France, is in deep recession.

The problems faced by Britain indicate the European crisis isn't confined to the eurozone. Fitch credit ratings agency downgraded the United Kingdom to AA+ citing a weakened economic outlook.

The move follows Moody's downgrade in February and has upset plans for London to attract more investors from the oil-rich Persian Gulf region through Islamic finance instruments.

Britain is also worried that European plans for a financial transactions tax will damage the City of London's financial status.

FTT which aims to raise public funds and encourage more responsible trading by financial institutions and is likely to be adopted in 11 EU states. London wants to block the tax entirely as it fears the tax will be levied on deals carried out even partly in London. FTT provisions state the tax will apply to any deal linked in any way with institutions from any of the 11 countries supporting FTT. The FTT provisions will also affect U.S. financial transactions.

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