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Why Cyprus is small potatoes

The recent market panic at a proposed European Union and IMF bailout of Cypriot banks may be an overshoot.

To put matters in perspective: in terms of GDP, Cyprus’ economy is just half the size of Idaho’s. This sleepy Midwestern state is best known to the rest of the U.S. and the world as a source of high-quality potatoes. That makes Cyprus’ economy… pretty small potatoes.

Of course, this fact may be cold comfort to Cypriots and foreigners whose personal wealth is deposited inside the country’s banks, and who were understandably rattled by the proposed tax on deposits initially discussed to help fund the bailout.

The proposal is still evolving and the parties involved have at least moved beyond the initial idea to levy a tax of 6.75% on depositors with balances below €100,000. As Reuters reports:

Cyprus, the European Union and the International Monetary Fund have agreed a new plan to resolve the island’s bank and finance a rescue of the country, an EU official said early on Monday.

The proposal, which will now be presented to euro zone finance ministers for discussion, will involve setting up a “good bank” and a “bad bank” and will mean that Popular Bank of Cyprus, known as Laiki, will effectively be shut down.

Deposits below 100,000 euros in Laiki will be transferred to Bank of Cyprus. Deposits above 100,000 euros, which under EU law are not insured, will be frozen and will be used to resolve debt. It remains unclear how large the writedown on those funds will be.

The EU spokesman said there would be no “levy” imposed on any Cypriot banks, with the package requiring a full “bail-in” of uninsured depositors, which is likely to mean heavy losses for those with large holdings in Laiki and potentially Bank of Cyprus, where many Russians hold bank accounts.

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Why Cyprus matters for investors

Over-taxed and confused

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Catherine Baab-Muguira does not own shares in any of the companies mentioned in this article.

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