Euro-area finance chiefs, pressuring Cyprus to shrink its banking system as the condition for a bailout, are reviving demands they jettisoned last week as too extreme, four European officials said.
Finance ministers for the 17 euro countries are considering a plan to shutter the two biggest banks in Cyprus and freeze the assets of uninsured depositors, said the four officials, who asked not to be named because the talks are ongoing.
Cyprus Popular Bank Pcl and the Bank of Cyprus Plc would be split to create a so-called bad bank, one of the officials said. Insured deposits -- below the European Union ceiling of 100,000 euros ($129,000) -- would go into a so-called good bank and not sustain any losses, while uninsured deposits would go into the bad bank and be frozen until assets could be sold, said the four officials.
Losses to unsecured creditors, including uninsured depositors, could reach 40 percent under the plan, which has support from the International Monetary Fund and the European Central Bank. The proposal, a version of which was rejected last week, is considered a better option than taxing insured deposits or allowing Cypriot banks to collapse in a disorderly fashion if they lose access to ECB aid, the officials said.
“Two Cypriot banks are threatened with insolvency, the situation is serious,” Steffen Seibert, spokesman for German Chancellor Angela Merkel said in Berlin March 20. “A fix should be made possible, but that can only happen through involving investors. Insolvency and winding down would mean a far higher loss for each investor than the (Cypriot) share that’s envisaged. To that end, the eurogroup and the German government see it as mandatory that investors are brought in.”
After a teleconference late yesterday, the finance ministers called for a Cypriot proposal to unlock bailout funds as quickly as possible.
Cyprus also is exploring other options to avoid hitting uninsured depositors with big losses. None of the alternatives such as a so-called solidarity fund have won support from euro authorities, who hold the key to 10 billion euros in bailout funds which they have said must be matched by 5.8 billion in Cypriot funds, preferably from the banking sector.
The ECB is preparing to lower limits on cash withdrawals from automated teller machines in Cyprus and may introduce capital controls separate from any bailout accord, German newspaper Handelsblatt reported today, citing central bank sources it didn’t identify.
In Nicosia, Cypriot central bank Governor Panicos Demetriades proposed bank-overhaul legislation that would protect deposits of as much as 100,000 euros and keep Cyprus Popular in business.
At an overnight meeting in Brussels last week, the finance ministers backed a plan to tax all deposits -- rejected by Cypriot lawmakers March 19 -- after the plan to shutter the banks was deemed unacceptable by the Cypriots and too great a risk to financial stability by France, among others.
Cyprus’s bank assets swelled to 126.4 billion euros at the end of January, seven times the size of the 18 billion-euro economy, from 78 billion euros in 2007, data from the European Central Bank and the EU’s statistics office show.
The ECB turned up the pressure on Cypriot President Nicos Anastasiades and euro-area finance ministers 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.”
The ECB referred queries to Cypriot authorities. A spokeswoman for the Cypriot central bank could not immediately be reached by phone or e-mail. The European Commission referred to statements at a press conference earlier today, in which a spokesman said the commission was waiting to hear from Cypriot authorities and searching for a sustainable outcome for Cyprus.
Austrian Finance Minister Maria Fekter alluded to the plan yesterday, saying France led opposition to the option of “bailing in” depositors at the two banks.
“Germany, the IMF and Austria would have preferred a bail-in,” Fekter said. “A bail-in of around 38 percent, that means a haircut at those two banks, and with this haircut we could have moved more than 6 billion euros, as a debt cut.”