The European Union is once again facing a significant financial crisis as Cyprus has pushed Greece, Portugal, Italy and Spain from the headlines. How can such a small country – with fewer than one million citizens – have such a large impact on the global economy? The answer is complicated, much like the March 25 bailout agreement between the troika – the European Union, the International Monetary Fund and the European Central Bank (ECB).
The agreement with the Cypriot government paves way for Cyprus to receive a €10 billion bailout. In return, Cyprus has agreed to downsize its large financial sector and undertake a macroeconomic adjustment program that will require fiscal consolidation, structural reforms and privatizations (among other concessions). In return, the ECB will continue to provide emergency liquidity assistance to Cyprus banks.
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Lalith Samarakoon is professor and chair of the Department of Finance in the Opus College of Business. As a financial economist, Samarakoon has two decades of advisory experience in financial sector reforms and development, and public debt management. He teaches Global Finance Issues and Policy: Eurozone Debt Crisis.