Almost all of the media coverage of late is centred around Cyprus as it struggles to come to terms with a mountain of debt. So what’s up with Cyprus and should we be concerned?

Cyprus was hit hard when Greece agreed to the austerity measures imposed by the European Union. As part of Greece’s deal, many holders of Greek debt were asked (forced) to reduce the amount of money Greece owed them. For its small size, Cyprus had a large amount of funds on loan to Greece and this translated directly to less money coming back into Cyprus.

The knock-on effect saw the Cypriot economy downgraded to ‘junk-status’ and a corresponding rise in long-term bond rates to 12% (generally anything above 6% is cause for concern).

Eventually Cyprus asked the European Union (EU) for a bailout and we are now living through the media coverage of this event.

The EU proposed a bailout package whereby all deposits in Cyprus banks would be taxed, raising around 6 billion euros, with the EU tipping in another 10 billion euros to bailout the country.

Not surprisingly, the Cypriot Government unanimously voted against these terms and they are now back to the drawing board to come up with a more palatable bailout package (Plan B).

Interestingly, it is estimated that around one third of deposits held in Cyprus banks are owned by Russians, so, to add some spice to an already heated situation, there is a level of reluctance from the European Union, and in particular Germany, to have their tax payers bailout a country when a large number of Russians would benefit.

So, after all that, should we be concerned about the situation in Cyprus?

Cyprus is very small, making up a mere 0.2 per cent of the Eurozone, so a banking collapse in Cyprus would not be nearly as detrimental if one of the big players like Spain or Italy went under. The reason Cyprus is such a hot topic is because of the proposed bailout terms. If the EU can come in and tax the deposits of Cypriots, what’s to say they can’t, or won’t, do the same for other countries? This calls into question the integrity of the banking industry and could even cause a run on banks if people begin withdrawing large sums of money to avoid a potential tax.

We continue to monitor the situation in Cyprus and the Eurozone in general to see if any action needs to be taken, but for the time being all we can do is wait and see what ‘Plan B’ the EU and Cyprus might come up with.