Cypriot President Nicos Anastasiades speaks on his phone in his car as he arrives at the airport in Brussels on Sunday, March 24, 2013. The EU says a top official will chair a high-level meeting on Cyprus in a last-ditch effort to seal a deal before finance ministers decide whether the island nation gets a 10 billion euro bailout loan to save it from bankruptcy. (AP Photo/Geert Vanden Wijngaert)
FRANKFURT, Germany (AP) — This week’s deal to rescue Cyprus and its banks from financial collapse has renewed fears about Europe’s shaky financial system and where trouble might next appear.
Many banks across Europe have been struggling for more than three years as losses on government bonds and bad loans piled up. Some governments, meanwhile, have taken on more debt trying to prop up their lenders to the point where they have needed bailing out themselves.
In Cyprus’s case, its banking sector became much bigger than the country’s government could afford to rescue — seven times the size of the country’s economy. When the banks were hit by large losses and Cyprus could not afford to bail it out on its own, the country turned to the other 16 European Union countries that use the euro.
Rather than making Europe’s taxpayers foot the entire bill for bad banking, Cyprus and the other eurozone countries agreed to make the banks’ bondholders and big depositors contribute to the rescue. One bank, Laiki, is to be split up, with its nonperforming loans and toxic assets going into a “bad bank.” The healthy side will be absorbed into the Login to read more