Cyprus has become the latest eurozone nation to apply for a bailout amidst a financial crisis linked to debt defaults in neighboring Greece. The Mediterranean island has a huge banking sector and its public debt is expected to match GDP within the next decade. Proposals to tax existing bank deposits as part of a rescue package have alarmed investors.

CNN explains the situation.

Why is Cyprus facing financial problems?

In a March 16 statement on the agreement, the Eurogroup -- an informal body of eurozone finance ministers -- said the "current fragile situation of the Cypriot financial sector" was linked to its large size relative to the country's GDP. Eurogroup president Jeroen Dijsselbloem said Cyprus' banking sector was more than five times the size of GDP and the group predicted that the island's public debt would reach 100% of GDP in 2020.

Are Cyprus' issues related to the financial crisis in Greece?

According to CNN's Jim Boulden, we need look no further than the streets of Athens to understand how Cyprus ended up in its current position.

When a bankrupt Greece was allowed to let some of its private bond holders take a loss -- a "haircut" -- Cypriot banks lost money and needed refinancing. So the big financial institutions like the Bank of Cyprus asked for a bailout from the government, and the government came to the EU in June 2012 saying it needed a bailout in turn.

Talks have dragged since then, as Cyprus resisted many of the tough economic measures demanded by potential institutional lenders in return for bailout funds. Boulden said one sticking point was whether Cyprus would have to raise its corporate tax from the EU's lowest of 10% to 12.5% -- equal to Ireland.

What's being proposed in Cyprus?

Cyprus is trying to get a €10 billion eurozone bailout. Under the Eurogroup proposal, all holders of bank accounts in Cyprus -- both residents and non-residents -- will be required to pay a one-off tax on their existing deposits. Account holders with more than €100,000 ($130,000) would pay a 9.9.% levy, while those with smaller deposits would face a 6.75% rate.

The money would be used to prop up Cypriot banks that were badly exposed to the financial crisis in Greece. The Financial Times reported that the depositor levy was demanded by a German-led group of creditor countries to bring down the bailout's price tag from €17 billion ($22B).

Will the proposal go through?

On Monday March 18, a Cypriot parliamentary vote on the measure was postponed until Tuesday. The Eurogroup said it expected "that the ESM [European Stability Mechanism] Board of Governors will be in a position to formally approve the proposal for a financial assistance facility agreement by the second half of April 2013 and subject to completion of national procedures." International Monetary Fund (IMF) chief Christine Lagarde said she would recommend the body accept the proposed deal.

Read more: Five reasons bailout matters

Will this set a precedent for other European countries?

CNN Money said the move was being closely watched because of the potential to destabilize financial markets in Europe; there are also concerns that other financially weak nations might fear similar bailout provisions in the future. "The question is whether this becomes a full-blown crisis or a mini-crisis," Steven Englander, global head of foreign exchange strategy at Citi told CNN Money. "Depositors and investors elsewhere could easily see this as another in a string of 'one-offs' and react badly."

Has such a tax been imposed anywhere before?

It is the first time in the EU. In 2001, the IMF released a report on bank debit taxes that had been imposed in Latin America -- however, these taxes were on financial transactions not an outright grab as is being proposed in Cyprus.

Read more: Deposit tax is punishing Cypriot people

Won't this cause a run on banks?

At least 35 banks from around the world have branches in Cyprus, according to the country's central bank. Cyprus' parliament needs to approve the deal but Cypriots rushed to withdraw their savings from bank ATMs after news of the plan. CNN's Isa Soares said some banks were already refusing to release cash or putting limits on withdrawals. Cyprus has extended its Monday bank holiday until Thursday.

What will happen if the proposed deal doesn't go through?

In an address to the nation on March 17, President Nicos Anastasiades said the bailout option was "very difficult" but one that would eventually lead to economic recovery in Cyprus. He said failure to agree to the package would "lead to disorderly bankruptcy as a result of the decision of the European Central Bank to immediately discontinue the provision of emergency assistance to preserve the liquidity of the two large banks." This would have meant depositors would have lost access to their deposits, and a large number would have faced significant losses, he said.

Story courtesy of CNN