European governments battled to save Cyprus from financial ruin, seeking to prevent the woes of the euro area’s third-smallest economy from reviving the debt crisis and rattling markets.
Cyprus’s leaders sparred over the terms of a 10 billion-euro ($13 billion) bailout with euro-area finance ministers, the European Central Bank and International Monetary Fund in the second Brussels crisis meeting in nine days.
A threat by the ECB to cut off emergency financing for Cyprus’s tottering banks as soon as tomorrow gives the Mediterranean island’s leaders the choice of either bowing to creditor demands that it shrink its financial system or else face potential default and an unprecedented exit from the euro.
“It is not up to us,” German Finance Minister Wolfgang Schaeuble told reporters on his way in to the meeting. “The decision is now with Cyprus.”
The full 17-nation meeting was delayed by more than two hours as clusters of European and national officials bargained with Cypriot President Nicos Anastasiades, in office for less than a month.
“We are doing our utmost,” Anastasiades said in a Twitter posting. Hundreds of protesters massed outside the floodlit presidential palace in Nicosia, one group brandishing a banner that said: “It’s capitalism, stupid.”
A rescue package hammered out March 16 in Brussels fell apart three days later when the Cypriot parliament rejected a tax on all bank accounts on the island, forcing Cyprus to hunt for other sources of the 5.8 billion euros demanded by the creditors.
A Cypriot mission to Russia, the island’s biggest foreign investor, failed to come up with an alternative. Finance Minister Michael Sarris said yesterday that bank-deposit levies are back on the table.
The German-led bloc of creditors hasn’t wavered from demands that Cyprus shrink its banking industry, with total assets estimated by the European Commission at 750 percent of Cypriot gross domestic product, more than double the euro-zone average.
Cyprus Popular Bank Pcl, the second-biggest, will be wound down and have losses imposed on its depositors, under plans approved by the Cypriot parliament on Friday. At stake tonight was how much more Cyprus will be forced to squeeze a “business model” that is over-reliant on banks.
“We have to have a solution here tonight, because this is about the stability of the entire euro zone and it would be very bad to put that at risk,” Luxembourg Finance Minister Luc Frieden.
The euro slipped 0.3 percent to $1.2951 as of 8:45 p.m. Brussels time, after last week posting the biggest loss in three weeks against the dollar. European stocks last week notched the largest weekly decline in four months.
European governments have wrangled over aid for Cyprus since June, exposing holes in the euro’s revamped economic management system that was built, piece by piece, after Greece’s ballooning deficit triggered the debt crisis in late 2009.
A tightening of Europe’s budget-deficit restrictions and new rules to penalize countries with unbalanced economies or asset bubbles failed to stop the rot in Cyprus, which makes up less than 0.2 percent of the euro-zone economy.
All the contradictions of the debt-crisis management came together over Cyprus, with name-calling between northern and southern Europe, tensions between unelected central bankers and elected politicians, and the disconnect between slow-moving policy makers and lightning-fast markets.
An emerging deal would need to be blessed by the central bank, represented in Brussels by President Mario Draghi, an Italian, and Joerg Asmussen, a German on the Executive Board. The ECB has threatened to cut off emergency funding to Cypriot banks, which have been closed all week and are due to reopen on March 26.
“Sand is running through the hourglass quickly,” Finnish Finance Minister Jutta Urpilainen said. “We need to find a solution overnight.”