Cypriot lawmakers begin debate today on legislation to unlock bailout funds and prevent a financial collapse with a European Central Bank deadline to cut off funding for its lenders in three days.
Euro-area finance ministers expect a proposal from Cyprus “as rapidly as possible” to raise the 5.8 billion euros ($7.5 billion) needed to trigger the emergency loans, they said in a statement late yesterday after meeting in a teleconference. The euro fell after Cyprus Finance Minister Michael Sarris said the nation didn’t get the financial support it sought from Russia.
“Cyprus has it in its own hands to prevent the state’s bankruptcy but time is running out,” said Hans Michelbach, a German lawmaker and ally of Chancellor Angela Merkel.
The race for a compromise comes after a week of tumult marked by Cypriot lawmakers’ rejection of a tax on bank deposits. That was demanded by the other 16 euro countries and the International Monetary Fund as the condition for a 10 billion-euro rescue. Cypriot police scuffled with protesters, including employees of Cyprus Popular Bank Pcl, outside Parliament yesterday as President Nicos Anastasiades maneuvered at home and in Russia to raise cash.
After Russia spurned his bid for credit, the Cypriot central bank proposed a bill to overhaul the banking system that would allow Cyprus Popular, the country’s second-largest lender, to avoid a “catastrophic” bankruptcy and protect insured deposits to an amount of 100,000 euros.
Sarris met with First Deputy Minister Igor Shuvalov and Finance Minister Anton Siluanov on March 20, asking Russia to restructure a 2.5 billion-euro loan that was granted in 2011. He said today Cyprus has failed to gain the financial support from Russia that it sought.
“I think the loan will be extended and the conditions adjusted,” Sarris said. “But the rest of the support we are not ready to have concluded anything.”
Sarris said yesterday that Russia was unable to provide loans and would instead consider making investments in the Cypriot energy industry, according to an interview broadcast on Antenna TV.
Cyprus in June became the fifth euro-area nation to request a rescue. The action came after Greece’s debt restructuring, the largest in history, trashed the financial health of lenders including Bank of Cyprus Plc and Cyprus Popular.
The euro fell 0.1 percent to $1.2891 as of 3:06 p.m. in Tokyo, after declining 0.3 percent yesterday. It dropped to $1.2844 on March 19, the lowest since Nov. 22. For the week, the euro is set for a 1.4 percent decline versus the greenback.
Once Cyprus presents its new proposal and the so-called troika that oversees euro-area bailouts has analyzed it, euro ministers will “be prepared to continue negotiations on an adjustment program, while respecting the parameters defined earlier,” according to the statement.
“After the conclusion of such negotiations, the Cyprus authorities should begin legislating the elements of such an agreement,” the Eurogroup said, reiterating the importance of fully guaranteeing bank deposits of less than 100,000 euros.
As the standoff continued, Standard & Poor’s cut its rating on Cyprus by one level to CCC from CCC+, citing “acute problems” in the island nation’s banking industry. S&P said it has a negative outlook, pointing to the possibility of another cut. Investors often ignore ratings, as evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011.
“We would likely lower the rating if Cyprus’s government fails to obtain a financing program soon,” S&P said. “If it secures a program, we could also lower the ratings later this year if we believe the government is unable to fulfill the program’s conditions.”
The ECB turned up the pressure on Anastasiades and euro-area finance chiefs to deliver a rescue package, saying it may cut off emergency funds to Cypriot banks after March 25 unless a plan is in place “that would ensure the solvency of the concerned banks.”
Central bank Governor Panicos Demetriades unveiled the bank restructuring bill, saying it would avert “the risk of bank collapse,” help meet the conditions for an aid deal with European authorities and the International Monetary Fund and allow Cypriot banks to reopen on March 26. His statement didn’t divulge details of the plan.
“We appear to be seeing an improved spirit of cooperation on the part of the Cypriot authorities,” Simon O’Connor, a European Commission spokesman, said in an e-mailed statement. The commission is “conditionally satisfied” with Cyprus’s progress toward adopting legislation on bank resolution and capital controls, he said.
Despo Pambaka, 28, a Cyprus Popular employee for almost five years, said she feared for her job. “This is not the Europe we wanted to enter,” she said during the protest outside Parliament. “The big bosses running the banks took their bonuses and left the people on their own. We expected help from the European Union and this is what we get.”
The government also submitted a draft law to create an “investment solidarity fund,” state-run CYBC television reported. The fund is intended to help raise the 5.8 billion euros needed to trigger emergency loans, Athens News Agency reported.
Russia is in talks over its possible role in the fund, the RIA Novosti news agency reported. President Vladimir Putin held talks in Moscow yesterday with Jose Barroso, head of the European Commission, Putin’s spokesman Dmitry Peskov told reporters.
Earlier, Prime Minister Dmitry Medvedev said Cyprus’s financial turmoil may force Russia to review the share of euros in its international currency reserves, the world’s fourth-largest stockpile.