European policy makers are weighing how far to push Cyprus after lawmakers in the Mediterranean nation rejected an unprecedented levy on bank deposits, throwing into limbo a rescue package designed to keep it in the euro.
Stocks and the euro gained as investors speculated that the European Central Bank, whose Governing Council meets today in Frankfurt, will continue to support the country’s banks. Luxembourg Finance Minister Luc Frieden called for the 17 euro finance ministers to reconvene as soon as possible to forge a new bailout.
“This is not a good result -- neither for Cyprus, nor for the euro zone, and we have to look together for alternatives to the negotiated package,” Frieden said yesterday in a phone interview from Frankfurt. “What matters now is to undertake all necessary measures to ensure the stability of the euro zone.”
Cyprus’s rejection came after days of recrimination sparked by European plans to force depositors in the country to shoulder part of the bailout with their savings. Cypriot President Nicos Anastasiades returned from marathon talks in Brussels on March 16 saying the alternative would be the “indescribable misery” of the ECB cutting off funding to one of its banks.
Officials from the so-called troika of the ECB, the International Monetary Fund and the European Commission are in Cyprus discussing further capital controls and the possible extension of a bank holiday through to the end of the week, a European official familiar with the talks said on condition of anonymity because the discussions are confidential.
Cypriot Finance Minister Michael Sarris missed the ballot as he flew to Moscow to hold talks about financial assistance. Russian companies and individuals have $31 billion of deposits in Cyprus.
Russia and Cyprus are continuing loan talks, Sarris said after meeting with Russian counterpart, Finance Minister Anton Siluanov. The talks included “things beyond that,” Sarris said when asked about extending the term of an existing 2.5 billion- euro ($3.2 billion) loan from Russia or a new credit. Sarris will meet First Deputy Prime Minister Igor Shuvalov, Interfax said, citing an unidentified government official. Negotiations will take “as long as it takes,” Sarris said.
European (SXXP) stocks advanced, with the Stoxx Europe 600 Index gaining 0.2 percent as of 10:25 a.m. in Berlin. The euro, which fell to almost a four-month low yesterday, strengthened for the first time in three days, to $1.2886, after the ECB pledged to provide liquidity to Cyprus.
While the island country accounts for less than half a percent of the euro-region economy, the fight over the bank tax risks triggering new turmoil in the financial crisis that began in 2009 in Greece.
Cyprus “has some symbolism impact on Europe, but it’s not a really major economic issue,” Laurence D. Fink, the chief executive officer of BlackRock Inc. (BLK), the world’s largest asset manager, said in a Bloomberg Television interview in Hong Kong today. “It does remind us of the frailty of Europe. It does remind us that the European fix will be multiple years.”
Germany and its euro-area allies maintained pressure on the island’s politicians today to raise a planned 5.8 billion euros by drawing funds from Cyprus bank accounts in return for 10 billion euros in external aid.
Austrian Finance Minister Maria Fekter said the demand for Cyprus’s share of the rescue stands and raised the threat of an ECB funding cutoff. Cyprus’s “business model is no longer tenable” and “must be restructured,” German Finance Minister Wolfgang Schaeuble said on ZDF television.
The offer made last weekend “remains on the table,” Schaeuble said in a separate statement. “Adequate precautions” have been taken to ensure the Cyprus vote “will have no negative effect on the rest of the euro zone,” he said. Dutch Finance Minister Jeroen Dijsselbloem, who chairs the meetings of finance ministers, said in a text message that the euro group “stands ready to assist Cyprus in its reform efforts.”
Protesters cheered outside the parliament in the Cypriot capital, Nicosia, as lawmakers rejected the proposal by 36 votes against with 19 abstentions. There were no votes in favor. The bill exempted deposits of as much as 20,000 euros, imposed a 6.75 percent levy on amounts between 20,001 and 100,000 euros, and taxed deposits exceeding 100,000 euros at 9.9 percent.
Anastasiades met with political party leaders in Nicosia today as Cyprus’s banks and stock exchange remained closed. The parties have put together technical teams who will meet at the Central Bank of Cyprus to discuss a “plan B” with central bank officials on how to raise the 5.8 billion euros needed, Christos Stylianides, a government spokesman, said.
The ECB’s support for Cyprus’s banks could now come into focus. Cypriot government bonds became ineligible as collateral in refinancing operations in June last year, after all three major ratings agencies had downgraded Cyprus to junk status.
That forced Cypriot banks to turn to so-called Emergency Liquidity Assistance from the Central Bank of Cyprus. Under ELA, the national central bank may continue to lend to commercial banks at a higher interest rate and only with the permission of the ECB’s Governing Council.
Should the ECB consider the situation untenable, it could refuse to sanction the provision of further liquidity. The central bank said in a statement after yesterday’s vote that it would continue to provide funding as needed “within the existing rules.”
The deposit levy, championed by Germany and pulled together in a 10-hour negotiation session in Brussels, drew worldwide criticism that it broke a taboo over the safety of bank-deposit savings and risked launching a bank run in other European countries. Cypriots awoke March 16 to find bank transfers blocked, prompting images of long lines at ATMs.
“It seems at this moment there is no third way,” Averof Neophytou, vice-president of Anastasiades’s Disy party, told the chamber before the vote in which his party abstained as outside demonstrators chanted “this will not pass” and sang the national anthem. “But we must try to find a different path.”
Anastasiades spoke by phone with Merkel yesterday for the second time in as many days, German government chief spokesman Steffen Seibert said in a text message, declining to give details of the conversation. Merkel is due to brief members of the German parliament’s European affairs committee in private today. French President Francois Hollande is due speak by phone with Anastasiades this morning, Hollande’s spokesman said.
“This is not the end of the process, but instead kicks off a further round of negotiation with Moscow and Berlin,” Alexander White, a European political analyst at JPMorgan Chase & Co. in London, said in a note. “The Cypriot authorities wanted to conduct the vote so that they could reaffirm the extent of their difficulties to the Europeans.”