At the EU summit and then the Eurogroup meeting last week, an agreement was reached on the terms of the bailout for Cyprus. The Cypriot Parliament rejected these terms and the party of the newly elected President, Nicos Anastasiades, abstained during the parliamentary vote.

This means that Cyprus cannot get the bailout funds from the European Central Bank and needs to come up with a new plan to fund its banks. Meanwhile, the international financial markets got very jittery once again and share prices went decidedly down in the last couple of days.

However, let us place the whole thing into perspective. Cyprus has had to face three very severe challenges. The first was the explosion at their power station some two summers ago. This meant more than €2 billion literally went up in smoke. The Government of the day took a loan from Russia to finance the building of a new power station.

Then the same Government adopted a very loose approach in terms of public spending. Since the previous President, Dimitris Christofias, was elected with the support of the trade unions, it did very little to control the payroll costs of the public sector. This made him highly unpopular with the rest of the country and, in fact, he did not seek re-election.

The third challenge was the very high exposure of Cypriot banks to Greek debt. There is a strong cultural link between Cyprus and Greece and so it was very natural for Cypriot banks to purchase Greek government bonds. The consequences of the Greek crisis left the banks totally illiquid and requiring support from the ECB.

Cypriot banks are dependent on emergency funding from the ECB, which on its part said that it is committed to providing liquidity within the existing rules. Banks in the country are currently closed and will remain closed until a solution is found.

What are the Cypriot Parliament and Cypriots in general objecting to? Cyprus has been offered financing amounting to €10 billion, on condition that it would raise some €6 billion through taxation. Part of that internal financing is expected to come from a tax on bank deposits. It was this particular aspect that made the deal objectionable.

The thinking within the EU and the ECB is that the financial sector of Cyprus is around eight times the GDP (also because of a great deal of Russian money that was invested in the country) and so must pay part of the cost of the bailout. It was the first time that the EU has asked for a tax on deposits and the president of the Eurogroup said that it was a unique case and such a tax would not be imposed again.

If Cyprus does not accept the imposition of the tax on deposits (its structure can be determined by Cyprus itself), then there is no bailout deal with the EU and ECB. At this point Cyprus needs to come up with a so-called Plan B or possibly default and leave the euro. The €10 billion being provided by the ECB represents some 56 per cent of the gross domestic product of the country, making it, in relative terms, one of the largest bailouts in recent history.

However, the GDP of Cyprus is only 0.2 per cent of the GDP of the EU, which makes the impact of a default very small. The problem is that a default would destroy a nation for the second time in 40 years (the first one being the invasion of the island by Turkey in 1974). In fact, Cyprus is still a divided country and is likely to remain so.

Yet the EU is insisting on this tax on bank deposits. Given the high level of Russian bank deposits in Cyprus, Russia has been brought into the picture. There are now analysts who are claiming that the situation has become very serious as it has developed into an issue of EU versus Russia and become very much a game of Russian roulette.

What about Mata in all this? Our share of the EU GDP is even smaller than that of Cyprus. However, our financial sector is around eight times our GDP. Yet, we are not in the same position as Cyprus. There are two very good reasons for that and we need to understand them.

First, banking regulation and supervision, coupled with the decisions taken by commercial banks, has ensured that our financial system is not dangerously exposed to situations such as that of Greece. Secondly, our public finances have been and are well managed, thus maintaining the level of public debt at sustainable levels. We need to ensure that these two elements are kept in place to avoid the Cyprus experience.