7 Things You Need to Know About the Shocking Cyprus Bailout Crisis That Has Everyone Freaked Out

By Lynn Stuart Parramore

March 17, 2013  |  Editor's Note: The parliamentary vote on the bailout has been delayed until Tuesday.

In a small island nation far, far away, the financial shit is hitting the fan. A new bailout package in the euro zone comes with terms that are causing a tsunami of anxiety across Europe and beyond. Here’s what’s happening and why it matters.

1. What the heck is going on?

Since 2008, the Greek economy has gone from bad to worse. As Greece’s economy collapsed, the European and Greek banks that held the nation’s debts should have been told to eat their losses, write off the debts, and replace their managements. Instead, the European Union stepped in to engineer one bailout after another. The prices for the bailouts were high: austerity policies that didn’t work. The result everywhere is that national income has fallen steeply, while the countries fall further into debt.

Cypriot banks got into trouble from their exposure to neighboring Greece. Finance ministers from euro countries and representatives from the IMF and the European Central Bank came up with a radical plan for a bailout to Cyprus’ banks: In exchange for €10 billion ($13 billion) in rescue money, creditors would impose a one-time tax of 6.75 percent on all bank deposits under €100,000 ($131,000) and 9.9 percent over that amount, while Cyprus cut government spending and raised revenues. The decision to make depositors pay was a stunning departure from past EU-led bailouts.