Cypriot leaders are trapped, trying to limit the damage to its banking sector after a firestorm of protest over initial plans to impose a special levy on customer deposits, the plan sparking global concern
AFP/Brussels
Cyprus President Nicos Anastasiades was locked in emergency talks with the island’s international creditors yesterday, as the clock ticked on a deadline to stave off bankruptcy and eviction from the European single currency.
All the big players assembled at EU headquarters in Brussels after the European Central Bank threatened to halt life-support funding if there was no deal by today, a day before Cyprus’s banks were due to reopen after a 10-day shutdown.
“I’m expecting a long night. I think a deal will be done tonight, but it will be late,” Irish Finance Minister Michael Noonan told reporters as he arrived for the talks.
Cyprus and its creditors are trying to reach a deal to restructure the island’s banks and deal with a mounting cash shortfall via a “haircut”, or levy, of large bank deposits.
Reaching this deal is the condition set by international creditors for the country to qualify for the bailout loans of up to €10bn ($13bn) it needs to avoid bankruptcy.
A eurozone governmental source said the initial requirement for Cyprus to raise €5.8bn before qualifying for the bailout would have to rise “slightly”.
“Unfortunately, the events of recent days have led to a situation where there are no longer any optimal solutions available. There are only hard choices left,” European Union economics head Olli Rehn had warned on Saturday.
He acknowledged that Cypriot leaders are trapped, trying to limit the damage to its banking sector after a firestorm of protest over initial plans to impose a special levy on customer deposits.
That plan sparked global concern — not least among major Russian investors — and rattled markets.
Rehn said he welcomed “progress” made towards meeting the EU-IMF demands but said it was essential that an agreement was reached last night.
Anastasiades first met ECB head Mario Draghi, IMF Managing Director Christine Lagarde, EU President Herman Van Rompuy, European Commission head Jose Manuel Barroso, Eurogroup chair Jeroen Dijsselbloem and Rehn.
The finance ministers from all 17 currency partners were to join the talks later last night for what was likely to prove yet another sleepless night in snow-covered Brussels.
One of those, France’s Pierre Moscovici, said on television before leaving Paris that it was time to put an end to “casino economy” practices on Cyprus.
“If we don’t, it’s you, it’s me, it’s all of us who will be left picking up the tab,” Moscovici said.
“The eurozone countries want to help Cyprus, but the rules must be respected, the aid must be relevant and the programme must tackle the problems at their root,” German Finance Minister Wolfgang Schaeuble told Welt am Sonntag newspaper.
The volume of Cyprus sovereign aid is a pittance compared to Nicosia’s closest ally Greece, which needed hundreds of billions all told in the eurozone’s first bailout three years ago.
But with Cypriot banks in lockdown already for 10 days, the fallout from the current crisis could still infect other troubled economies.
“We have learnt down the years that even little problems can become intractable,” said Holger Schmieding, chief economist with Germany’s Berenberg Bank. “There’s just no telling what can unfold in this type of situation.”
Cypriot reports suggested officials had made progress with EU and IMF representatives, having agreed a 20% haircut on Bank of Cyprus and a 4% levy on other banks.
A radical restructuring of the island’s second largest lender Laiki (Popular Bank) will already see all deposits over €100,000 put into a “bad bank” where they will be tied up for years and may never be fully recovered.
But negotiations stumbled on EU-IMF demands for a substantial levy on deposits above the same threshold in the Bank of Cyprus to avoid it facing similar restructuring. It holds more than a third of all deposits.
The haircut would take the form of a bond or share swap in a bid to get the measure through parliament, after MPs flatly rejected an earlier plan for a levy on all deposits.
UniCredit analyst Erik Nielsen said yesterday he believes “Cyprus will cave in,” although he warned of “some drainage of Cypriot deposits after the banks re-open” which would mean the ECB extending its emergency support a little.
University of Maryland professor Peter Morici said an exit from the single currency would be to Cyprus’s advantage.
“Iceland is also a financial centre but having its own currency, recovered rather quickly from a similar financial crisis,” he said.