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Trouble from Cyprus deal could linger for eurozone

Monday - 3/25/2013, 5:20pm  ET

DAVID McHUGH
AP Business Writer

FRANKFURT, Germany (AP) -- European leaders may have saved Cyprus from imminent financial collapse when they clinched a last-minute deal in the early hours of Monday morning.

The way they did it, however, has left political and psychological scars across Europe that are far out of proportion to the island nation's tiny size -- and that could hinder the eurozone's efforts to solve its debt crisis.

The deal was agreed with euro finance ministers along with the International Monetary Fund and the European Central Bank, hours ahead of a crucial deadline. The ECB was threatening to cut off crucial emergency assistance to Cyprus's struggling banks Monday if no agreement was reached. The resulting collapse would have dragged Cyprus's economy down and possibly pushed the country out of the euro.

As well as signing off on a 10 billion euros ($12.94 billion) rescue loan, the deal includes a far-reaching restructuring of the country's two largest banks, which were insolvent.

The rescue puts the costs of the country's broken banks where many analysts, finance officials and Europe's political leaders say they really belong: on the two big Cypriot banks' creditors, shareholders and big wealthy depositors -- not on taxpayers and small savers. The country also agreed to restructure and downsize its banking system, which had ballooned to seven times the size of the economy, so it would not threaten the country's economy again. The eurozone average is about 3
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