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Why Cyprus is facing a grave economic crisis

Last updated on: March 25, 2013 13:53 IST

Why Cyprus is facing a grave economic crisis

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Cyprus has escaped from the verge of bankruptcy. The collapse of Cyprus's banking system has been averted as European Union leaders on Monday agreed on a bailout package to keep Cyprus in the euro zone.

Cyprus will receive the first installment of the bailout package worth $13 billion in early May. Banks in Cyprus have been closed for more than a week and restrictions have been imposed on ATM withdrawal limit.

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Image: Protesters take part in an anti-bailout rally outside the parliament in Nicosia.
Photographs: Yorgos Karahalis/Reuters.
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Why Cyprus is facing a grave economic crisis

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Once a high-income economy, Cyprus has been facing a severe economic crisis. 

Hit by the Eurozone financial and banking crisis, in June 2012, the Cypriot government announced it would need 1.8 billion euros of foreign aid to support the Cyprus Popular Bank.

This was followed by Fitch down-grading Cypus's credit rating to junk status.

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Image: Demonstrators raise their arms in protest as Cypriot President Nicos Anastasiades's convoy drives to the parliament in Nicosia.
Photographs: Yorgos Karahalis/Reuters.
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Fitch said Cyprus would need an additional 4 billion euros to support its banks and the downgrade was mainly due to the exposure of Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank (Cyprus's 3 largest banks) to the Greek financial crisis.

Cyprus has been sought as a base for several offshore businesses for its highly developed infrastructure. Tourism, financial services, and shipping are money spinners for the economy.

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Image: An elderly man crosses the street in front of a branch of the Bank of Cyprus in Nicosia.
Photographs: Yorgos Karahalis/Reuters.
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Why Cyprus is facing a grave economic crisis

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Despite its low population and small size, Cyprus has a large off-shore banking industry.

With a total nominal GDP of $24 billion the country was unable to stabilise its banks, which had amassed 22 billion euros of Greek private sector debt.

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Image: Two Cypriot policewomen patrol at a main market street of capital Nicosia.
Photographs: Yorgos Karahalis/Reuters.
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The announcement that Cyprus would impose a tax on bank accounts as part of a 10 billion euro ($13 billion) bailout broke with previous practice that depositors' savings were sacrosanct and sent a shiver across the bloc, causing the euro to tumble and stock markets to dive last week.

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Image: A man selling ballons stands in the middle of the market Ledras street in Nicosia.
Photographs: Yorgos Karahalis/Reuters.
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Locals sit at a kebab restaurant in central Nicosia.

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Photographs: Yorgos Karahalis/Reuters.
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A man walks in front of shops in central Nicosia.

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Photographs: Yorgos Karahalis/Reuters.
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Two girls talk sitting at the Venetian Walls surrounding the old town of capital Nicosia.

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Photographs: Yorgos Karahalis/Reuters.
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Workers are seen on a construction site in central Nicosia. 

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Photographs: Yorgos Karahalis/Reuters.
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A girl waits at a bus station in Nicosia. 

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A man walks out of the Presidential palace in Nicosia. 

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Photographs: Yorgos Karahalis/Reuters.
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A youth skates in front of the Orthodox Faneromeni church in central Nicosia. 

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Photographs: Yorgos Karahalis/Reuters.
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Turkish Cypriot men, with a flag breakaway Turkish Cypriot state on the wall, pray at a mosque during Friday prayers in Famagusta's Tatlisu village, in the Turkish-administered northern part of Cyprus. 

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Photographs: Murad Sezer/Reuters.
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Turkish Cypriot children enjoy the mild weather in a park near an empty U.N. watchtower on the Greenline dividing the Turkish and Greek Cypriot sides of Nicosia.

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Photographs: Fatih Saribas/Reuters.
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A man kitesurfs near a beach at Limassol town in southern Cyprus.

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Cyclists look at boats in a marina near Limassol, a coastal town in southern Cyprus. 

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A Turkish-Cypriot and a Turkish flags are seen on Pentadaktylos mountain in the northern part of Nicosia. 

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Photographs: Yorgos Karahalis/Reuters.
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A group of tourists stand in an amphitheatre in the ancient Salamis bay ruins near Famagusta in north Cyprus.

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An orchestra performs during an official ceremony marking the assumption of Cyprus' six-monthly presidency of the European Union at the ancient Curium amphitheatre, near Limassol. 

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Flags of Northern Cyprus (2nd R) and Turkey (R) are seen in front of an Orthodox church (L) and a mosque, in the main square of Dipkarpaz, Riso Karpaso, some 150 km (93 miles) east of Nicosia, in the Turkish administered northern part of Cyprus.


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