The European Union gave Cyprus until Monday to raise the billions of
euros it needs to clinch an international bailout or face the collapse
of its financial system and likely exit from the euro currency zone.
In stark twin warnings on Thursday, the European Central Bank said it
would cut off liquidity to Cypriot banks and a senior EU official made
clear to Reuters that the bloc was ready to see the bankrupt island
banished from the euro in the belief it could then contain damage to the
wider European economy.
The ECB ultimatum came as the island's leaders struggled to craft a
"Plan B" to raise the 5.8-billion euro contribution demanded by the EU
in return for a 10-billion euro ($13 billion) bailout from the EU and
International Monetary Fund; angry Cypriot lawmakers threw out a tax on
deposits as "bank robbery."
The government said party leaders had agreed to create a "solidarity
fund" that would bundle state assets as the basis for an emergency bond
issue, but parliament speaker Yiannakis Omirou insisted a revised levy
on larger bank deposits, many of them held by Russians, was not on the
table.
The European Central Bank, which has kept Cyprus's banks operating with a
liquidity lifeline, said the government had until Monday to get a deal
in place, or funds would be cut off.
"Thereafter, Emergency Liquidity Assistance (ELA) could only be
considered if an EU/IMF program is in place that would ensure the
solvency of the concerned banks," it said.
In Brussels, a senior European Union official told Reuters that would
mean Cyprus's biggest banks would be wound up, wiping out the large
deposits it has sought to protect, and probably forcing the country to
abandon the euro.
"If the financial sector collapses, then they simply have to face a very
significant devaluation and faced with that situation, they would have
no other way but to start having their own currency," the EU official
said.
Cyprus's banking system, where massive Russian deposits give Moscow a
distinct interest, has been brought close to collapse by its exposure to
Greece, the epicenter of the eurozone debt crisis. But until this week,
the expectation in Brussels and on financial markets had been that the
appointment of a new Cypriot government in February would smooth the
path to a bailout deal.
Cyprus's central bank governor said he expected to clinch a financial support package by Monday. He did not say how.
The government has ordered banks to stay closed until Tuesday. The stock
exchange also suspended trading for the rest of the week. Monday is a
public holiday in Cyprus.
There were long queues at some bank branches in the capital Nicosia as
staff replenished cash machines, which have continued to operate while
banks have been closed since last week.
In Moscow, Cypriot Finance Minister Michael Sarris said he was
discussing possible Russian investments in the island's banks and energy
resources to reduce its debt burden, as well as an extension of an
existing 2.5-billion-euro Russian loan.
Russian citizens have billions of euros to lose in the island's outsized, teetering banking sector.
"The banks are the ultimate objective in any support we get, so it'll
either be a direct support to the banks or the support that we get
through other sectors will be channeled to the banks," Sarris told
Reuters during a second day of talks with his Russian counterpart, Anton
Siluanov.
He said Cyprus had no plans to borrow more money from Russia and add to
its debt mountain. The Russian Finance Ministry had said on Monday that
Nicosia sought an extra 5-billion-euro loan.
LIMITED OPTIONS
The chairman of eurozone finance ministers, Dutchman Jeroen
Dijsselbloem, told the European Parliament in Brussels that Moscow had
informed the EU it had no intention of plowing more money into Cyprus
beyond the existing loan.
"Any other options, to go further, another loan or an investment in the
banks, the Russians let us know that they are not willing to do that,"
he said. "Of course, the Cypriot government is now talking to the
Russian government on whether more can be done; I don't know the outcome
of that yet."
Dijsselbloem said new loans from Russia would in any case not solve the
country's debt problem, and that a revised levy on larger bank deposits
was still a possibility.
"I'm not sure that this package is completely gone and failed, because I don't see many alternatives," he said.
Senior eurozone officials acknowledged in a confidential conference call
on Wednesday that they were "in a mess" and discussed imposing capital
controls to insulate the currency area from a possible collapse of the
small Cypriot economy.
Cyprus itself refused to take part in the call, minutes of which were
seen by Reuters. Several participants described its absence as troubling
and reflecting the wider confusion surrounding the island's
predicament.
EU officials believe at least some of the 5.8 billion they are demanding
should come from the 68 billion euros ($88 billion) in Cypriot banks,
38 billion of which are in large deposits of more than 100,000 euros,
mainly from Russians and other foreigners. State guarantees would
normally apply to deposits below 100,000 euros.
Hitting small savers caused visceral outrage, and the Cypriot government
fears that foisting too big a burden on large depositors would wreck
the offshore financial industry that forms much of the country's
economy.
Among the other options, nationalizing pension funds of semi-public
companies could yield between 2 billion and 3 billion euros. Issuing
bonds linked to future natural gas revenue is problematic because
pumping any gas is years away.
"BULL IN A CHINA SHOP"
Doubts about the fate of the small nation of just 1.1 million people has
shaken confidence in the single-currency eurozone and raised
geopolitical tension between the EU and Russia.
Russian Prime Minister Dmitry Medvedev, who meets a European Commission
delegation in Moscow on Thursday, said the bloc had behaved "like a bull
in a china shop". He likened EU proposals, which would force Russian
customers to contribute to the rescue of Cypriot banks, to Soviet-era
expropriations.
Tuesday's parliamentary vote marked a stunning rejection of the kind of
strict austerity accepted over the past three years by crisis-hit
Greece, Portugal, Ireland, Spain and Italy.
European officials maintained the pressure on Nicosia.
"I cannot rule out a Cyprus insolvency," Austrian Finance Minister Maria
Fekter said in an interview with the newspaper Oesterreich. "A euro
exit would not achieve anything. Cyprus must act now."
With Cypriot Energy Minister George Lakkotrypis also in Moscow,
officially for a tourism exhibition, speculation was rife that access to
untapped offshore gas reserves could be on the table as part of a deal
for Russian aid.
Cyprus is a haven for billions of euros squirreled abroad by Russian
businesses and individuals - one of the reasons why Germany and other
northern eurozone states are reluctant to bail it out without a
contribution from bank depositors.
The proposed levy on deposits would have taken nearly 10 percent from
accounts over 100,000 euros. Smaller accounts would also have been hit,
although the government proposed softening the blow to spare savers with
less than 20,000 euros.
Cypriots were enraged at the proposal to tax accounts with less than
100,000 euros, which are meant to be protected by state guarantees
across the European Union.
Marinos Panaretou, a 36-year-old retail manager, said he had been
withdrawing the maximum 500 euros every day since Saturday, when news
broke of the proposed levy.
"People feel safer if we have cash on us because you don't know what
you're going to wake up to," he said. "Quite simply, you don't know
what's going to happen tomorrow."
European officials say the Cypriot government could have protected small
savers if it imposed a higher tax on big deposits, but it refused to do
so to protect the rich foreign clients of its offshore banking
business.
© 2013 Thomson/Reuters. All rights reserved.
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