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The fate of Cyprus to be decided and Russia threatens currency war with the Euro

Rumours abound that Eurozone officials have openly discussed the possibility of the island nation leaving the single currency as the Cypriot government votes on a series of proposals aimed at raising the desperately needed funds for the country to secure a bailout.

The European Central Bank announced that unless the island agreed to a radical debt-slashing programme it would withdraw all ‘emergency liquidity assistance’, a move that would lead to an immediate collapse of the country’s two largest banks and create a dire financial crash in Cyprus that could quickly spread throughout the rest of the Eurozone.

Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of Eurozone ministers, warned that Cyprus poses a “systemic risk” to Europe’s economy and banking sector, meaning a bank meltdown there could plunge other European countries into a new crisis.

“In the present situation I think there is definitely a systemic risk and I think the unrest of the last couple of days has proven this, unfortunately,” he said. He added that Cyprus will have to raid Russian deposit accounts to raise the €6 billion needed.

The Cyprus situation has irritated Russia causing Prime Minister Dmitry Medvedev to demand that Russia was involved in Eurozone talks regarding the island nation. “This scheme that is being discussed on Cyprus now looks absolutely absurd,” he said.”I think that in any case the Eurogroup could examine a future plan of regulating Cyprus with the participation of all the interested sides, including Russian structures.”

Mr Medvedev threatened an all-out currency war with the Euro by saying that Russia may need to review the share of Euro’s it holds in its central bank reserves, cash totalling around €175 billion.

“We have 41 or 42% of our reserves denominated in Euros – that is a lot of money, but for us, as for any country, predictability is important, and the offer that was made is not just unpredictable, it is evidence of some lack of rationality,” he said.

“A large number of our open public structures work through Cyprus. They now have money blocked for reasons that are unclear, because the source of that money is obvious. This money is declared everywhere. These include government structures. That’s why we have to take quite a firm position on the events around Cyprus and regulating the debt of Cyprus.”

The Cypriot finance minister had been in Moscow for a few days to try and hammer out a deal with the Russians but failed and returned home Friday to take part in a key vote that will attempt to find a solution to the crisis. Negotiations with the Troika of international lenders are ongoing.

The next few hours will determine the fate of Cyprus and its future in the Eurozone. The fallout from this latest crisis has harmed the Euro in recent days, causing it to weaken against the majority of its peers as investors look to the US Dollar, Japanese Yen and even the British Pound for a safe haven. Today however economists are betting that a deal will be reached causing the Euro to rise as the threat of contagion is expected to be contained.

As of 11:45 am

The Euro to Pound Sterling exchange rate is currently trading in the region of 0.8525

The Euro to US Dollar exchange rate is currently trading in the region of 1.2954

The Euro to Australian Dollar exchange rate is currently trading in the region of 1.2418

The Euro to New Zealand Dollar exchange rate is currently trading in the region of 1.5577