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Europe Weighs Cyprus’s Fate After Lawmakers Reject Deal

Europe Weighs Cyprus’s Fate After Lawmakers Reject Bailout Deal
Demonstrators protest against bank deposit tax plans outside the parliament in Nicosia on March 19, 2013. Photographer: Simon Dawson/Bloomberg

German Chancellor Angela Merkel signaled a readiness to engage with Cyprus after its parliament rejected a levy on bank accounts, as the Cypriot government scrambled to come up with an alternative source of financing.

Cypriot banks must contribute to a 17 billion-euro ($22 billion) rescue package after lawmakers torpedoed a plan to tap deposits, Merkel said in Berlin today. In the Cypriot capital, Nicosia, President Nicos Anastasiades discussed proposals for a “Plan B” with international creditors, state-run CyBC said.

“Cyprus is our partner in the euro area and therefore we are obliged to find a solution together,” Merkel told reporters. Saying that she “regrets” Cyprus’s decision, Merkel said the country must nevertheless render its banking sector “sustainable.” If Cyprus is to get aid, “it’s our obligation that we make sure there is a permanent solution,” she said.

European officials from Brussels to Moscow raced to salvage some form of rescue for the Mediterranean island nation after the vote ended days of recrimination sparked by plans to force Cyprus’s depositors to shoulder part of the bailout costs. Anastasiades, who agreed to the levy in marathon talks last weekend in Brussels, had said the alternative to the plan would be the “indescribable misery” of a banking collapse.

Moscow Mission

Stocks and the euro gained as investors speculated that the European Central Bank, whose Governing Council met today in Frankfurt, will continue to support the country’s banks until next week. Cyprus’s Finance Minister Michael Sarris held talks in Moscow to secure funding from Russia, whose companies and individuals have an estimated $31 billion of wealth in Cyprus, according to Moody’s.

The euro, which fell to almost a four-month low yesterday, strengthened for the first time in three days, rising 0.5 percent to $1.2949 at 5:04 p.m. in Frankfurt. European stocks advanced, with the Stoxx Europe 600 Index gaining 0.2 percent.

The issue of how far to push Cyprus confronted euro-area officials as the country’s banks and stock exchanges remain shut. The ECB will probably delay a decision on providing funding for Cyprus’s banks as it awaits clarity over a new plan, two people familiar with the deliberations said.

The Frankfurt-based central bank assumes that a bank holiday in Cyprus will be extended until the end of the week, the people said. Including a March 25 public holiday, that would give European policy makers five more days to forge a deal.

Capital Controls

Officials from the troika of international creditors -- the ECB, the International Monetary Fund and the European Commission -- are in Cyprus discussing further capital controls and the bank holiday extension, a separate official said.

ECB Executive Board member Joerg Asmussen said the central bank can “only provide emergency liquidity to solvent banks,” according to an interview in German newspaper Die Zeit. Cyprus bank solvency “can’t be considered a given unless an aid package, which ensures a fast recapitalization of the banking sector, is agreed soon,” Asmussen was cited as saying.

Protesters in the capital cheered outside the parliament yesterday as lawmakers rejected the proposal with 36 votes against and 19 abstentions. No legislators voted in favor of the motion, intended to raise 5.8 billion euros. The bill softened the original levy of 6.75 percent on all accounts below 100,000 euros by exempting those with less than 20,000 euros. Deposits exceeding 100,000 would be taxed at a 9.9 percent rate.

More Palatable

European officials are searching for ways to redo the burden-sharing proposals in the rescue package to make them more palatable. The commission is studying how to spare depositors with less than 100,000 euros along with technical workarounds that could raise the necessary money while lowering the proposed tax on larger accounts, according to an EU official. Merkel said the euro area had never wanted to levy sums below 100,000 euros.

In Moscow, talks with Russian Finance Minister Anton Siluanov included “things beyond” extending the term of an existing 2.5 billion-euro loan or a new credit, Sarris said.

Negotiations will take “as long as it takes,” Sarris told reporters after meeting Siluanov. Discussions with First Deputy Prime Minister Igor Shuvalov yielded no results, Russian state-run news service Prime reported. Russian President Vladimir Putin has called the called the Cyprus levy “unfair, unprofessional and dangerous.”

The 17 euro finance ministers, who pulled together the deposit-levy deal after 10 hours of negotiations March 15-16, should reconvene as soon as possible, Luxembourg Finance Minister Luc Frieden said yesterday in an interview. Their deputies plan a teleconference later today.

Dutch Finance Minister Jeroen Dijsselbloem, who chairs the meetings of finance ministers, said the euro group “stands ready to assist Cyprus in its reform efforts.” The European Commission called on Cyprus to come up with an alternative method of financing.

“The ball lies squarely in Nicosia,” German Finance Ministry spokesman Martin Kotthaus told a regular government press conference in Berlin.

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