Cyprus’s Fate Hangs in the Balance as ECB Deadline Looms
Cyprus’s fate hangs in the balance as euro-area finance ministers meet today to decide whether the tiny Mediterranean island has done enough for a bailout that will avert its financial collapse.
As thousands of protestors marched through the capital Nicosia yesterday, Cypriot officials worked to broker a deal with the European Central Bank, European Commission and International Monetary Fund on how to raise the 5.8 billion euros ($7.5 billion) needed to qualify for aid. Those talks, which focused on a plan to impose levies on bank deposits over 100,000 euros, ended at a “very sensitive stage” last night and will continue in Brussels today, the government said. Eurogroup finance ministers are due to convene in the Belgian city at 6 p.m.
“There are only hard choices left,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said in a statement. “It is essential that an agreement is reached by the Eurogroup on Sunday evening in Brussels on a financial assistance program for Cyprus.”
The third-smallest economy in the 17-nation euro area was plunged into chaos last week when its lawmakers rejected an EU proposal to confiscate a portion of all bank deposits in order to qualify for 10 billion euros in bailout funds. The ECB has imposed a deadline of tomorrow for a new deal to be struck by threatening to cut off emergency funding to Cypriot banks, which have been closed all week and are due to reopen on March 26.
“We cannot fund banks that are bankrupt,” ECB council member Erkki Liikanen told Finland’s YLE TV1 yesterday. “There is now a chance of drawing up a program in which the banks are recapitalized or reorganized to reach solvency. The ball is in Cyprus’s court.”
Cyprus Finance Minister Michael Sarris said yesterday that bank deposit levies were back on the table in discussions with the so-called troika of the ECB, Commission and IMF.
Media including Reuters and German newspaper Welt am Sonntag reported last night that a deal had been reached to apply a 20 percent levy on deposits over 100,000 euros at Bank of Cyprus Pcl, the country’s biggest lender, and a four percent tax on deposits of that size at other banks.
Those reports couldn’t be confirmed, and state-run Cyprus News Agency cited a government official as saying a deal wasn’t close.
President Nicos Anastasiades met with political party leaders last night to brief them on the troika talks.
“The situation is very difficult and the margins are tight,” Cyprus government spokesman Christos Stylianides said in an e-mailed statement. Anastasiades and Sarris will fly to Brussels today for further discussions, he said.
The Cypriot parliament passed nine bills on March 22 aimed at preventing capital flight and restructuring the banking sector. Cyprus Popular (CPB) Bank Pcl, the second-biggest, will be wound down and have losses imposed on its depositors.
A collapse of the nation’s banking system could precipitate its exit from the euro and unleash another wave of turmoil across a region already mired in a debt crisis and recession.
The Stoxx Europe 600 Index (SXXP) fell for the first week in a month on the back of the Cyprus impasse and the euro posted its biggest two-day drop since July at the start of the week. The Stoxx 600 steadied at the end of the week as investors bet on a compromise, and Europe’s single currency rose 0.7 percent.
“I don’t see any major contagion issues,” Finnish Prime Minister Jyrki Katainen told reporters in Saariselkae, Finnish Lapland, yesterday. “I’m very confident that we can see solutions tomorrow or Monday.”
The crisis is the biggest faced by Cyprus since it was invaded and its northern third occupied by Turkey in 1974.
Thousands of protestors, mainly bank employees, marched through the streets of Nicosia yesterday. They targeted the central bank, where they demanded the resignation of Governor Panicos Demetriades -- in office less than a year -- before congregating at Parliament and chanting “hands off our jobs and pension funds.”
Cyprus in June became the fifth euro-area nation to request a rescue. The move came after Greece’s debt restructuring, the largest in history, left lenders including Bank of Cyprus and Cyprus Popular reeling.
Cyprus Popular, founded in 1901 as a small savings bank, operates in Cyprus, Greece, the U.K., Ukraine, Russia, Romania, Serbia, Malta and China through 439 branches, serving 1.35 million customers, according to its website.
The bank, which employs about 8,500 people, posted a net loss of 1.56 billion euros for the first nine months of 2012, after a net loss of 3.65 billion euros in 2011 following writedowns on Greek government bond holdings, goodwill related to its Greek business and provisions for loan losses.
Cyprus’s total 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 ECB and the EU’s statistics office show. Russian companies and individuals have an estimated $31 billion of wealth in Cyprus, according to Moody’s Investors Service.
At 17 billion euros, Cyprus’s financial needs are almost equivalent to the country’s entire economic output, a magnitude of bailout that has never been awarded before, German Chancellor Angela Merkel told reporters on March 20. That means “the bank sector must contribute to the sustainability of Cypriot debt,” she said.
Sarris, who met last week in Moscow with Russian First Deputy Minister Igor Shuvalov and Finance Minister Anton Siluanov, has said that Russia won’t offer additional support beyond restructuring a 2.5 billion-euro loan granted in 2011.
To contact the editor responsible for this story: John Fraher at email@example.com