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Cypriots Are Suspicious, But Bailout Deal Seems Set

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The deal we posted about Sunday evening — a $13 billion bailout by international creditors for the beleaguered banking system on Cyprus — is being met with skepticism on that Mediterranean island nation.

On Morning Edition, correspondent Joanna Kakissis reported from Nicosia that some Cypriots fear the world they've come to know is coming to an end. Encouraged to build their banking sector into an international haven for foreign investment, Cypriots are now watching as the island's second-largest bank — Laiki — is being restructured and as large depositors are seeing their investments shrivel because of the taxes they'll now have to pay.

Other Cypriots wonder whether Germany and other much larger Eurozone nations have their eyes on natural gas reserves recently discovered off the island's coast and are applying financial pressure to get in on that action.

The overriding issue, economist say, is that a collapse of the Cypriot banking system could have set off similar pressures on other Eurozone members' financial systems — most notably those in Italy and Spain.

To avoid that scenario, as NPR's Soraya Sarhaddi Nelson added on Morning Edition, Cyprus is being forced to "cut the size of its banking sector ... tackle corruption ... and overhaul its budget" in exchange for the bailout.

The Wall Street Journal writes (paywall protected) that because of the austerity actions, "Cyprus could see its economy contract by 10% or more in the years ahead, economists said."

In Europe on Monday, financial markets reacted positively to news of the deal. BloombergBusinessweek writes that:

"Italy's bonds rose, with 10-year securities erasing declines since the country's inconclusive elections last month, after Cyprus agreed to the outlines of an international bailout to remedy the island's banking crisis.

"Italian and Spanish bonds climbed for a fourth day as the agreement on Cyprus boosted demand for the euro-area's higher- yielding assets. Benchmark German 10-year yields rose to a one- week high as the accord paved the way for 10 billion euros ($13 billion) of rescue loans, abating concern that Cyprus's economy would collapse and reignite the region's debt crisis."

Earlier posts:

-- Cyprus Gets Cold Shoulder From Russia On Bailout Aid

-- Europe's Central Bank Issues Cyprus Ultimatum

-- Cyprus Scrambles For 'Plan B' Bailout

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