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What's Next for Cyprus? New Plan Explained

Cyprus9After Cyprus’ loud “No” to a demand from international lenders that up to 9.9 percent of bank accounts be seized to help pay for a bailout, and a “loud silence” from Germany, the Cypriot government now has to find an alternative to prevent the collapse of state banks.
According to, a Plan B is being readied with Finance Minister Michael Sarris, who was reported to have resigned or been fired, still in his post on March 20 and heading back to Moscow to meet with officials there. Russia has given Cyprus a 2.5-billion-euro ($3.22 billion) loan which could be restructured.
Eurozone officials, working with the International Monetary Fund and European Central Bank (ECB,) the Troika providing $325 billion in rescue monies for Greece, offered to put up a 10 billion euros ($13 billion) bailout but said Cyprus needed to kick in with another 5.8 billion euros ($7.5 billion) by taking money directly out of the deposits of bank accounts, enraging Cypriots.
That led the Cypriot Parliament, in a humiliating 36-0 vote – with 19 abstentions – to reject newly-elected President Nicos Anastastiades’ support for the plan that a few weeks earlier during his campaign he had opposed. He tried to blame EU officials and they tried to blame him.
Kathimerini reported that Cyprus’ backup plans aims to raise 8.7 billion euros ($11.2 billion) by launching a special “code of co-operation” between Cyprus and the ECB, refinancing the Russian loan and imposing an emergency tax on Cypriot citizens which would bring in 3.7 billion euros ($4.78 billion.) There was no explanation how the deal with the ECB would work.
The ECB had threatened to turn off the liquidity to Cypriot state banks, which could lead to their near-immediate failure and economic chaos. Russians hold about 30 percent of the 68 billion euros ($85 billion) in Cypriot banks and President Vladimir Putin was angry over the idea of hitting them with a 9.9 percent tax for depositors over 100,000 euros, while those under that amount could have been taxed at 6.75 percent under the plan.
Following the defeat of the plan, Anastasiades spoke with Putin on the phone to pave the way for Sarris, who had been in Moscow just ahead of the vote, to scurry back in an apparent attempt to secure more funds. Some analysts said the plan’s defeat and what Cypriots called an attempt by the EU to “blackmail” them has now driven the government into the hands of Putin, who covets the potentially lucrative oil and gas fields that researchers believe lie off the coast.
Russian media said Putin was delighted by the vote of the Cypriots to snub the Troika, the first time a country has stood up to the lenders’ harsh demands, and would look agreeably upon a new deal with Cyprus. The giant Russian energy company Gazprom earlier had reported to put up bailout funds as well in return for oil and gas concessions, exactly what EU leaders had hoped to avoid but now have created.
Greek Cyprus pleaded for a new loan from Russia on Wednesday to avert a financial meltdown, but won no immediate relief after the island’s parliament rejected the terms of a European bailout, raising the risk of default and a bank crash.
Later on March 20, Sarris said he hadn’t been able to reach a deal in Moscow but that talks would continue. The European Central Bank’s chief negotiator on Greek Cyprus, Joerg Asmussen, said the ECB would have to pull the plug on Greek Cypriot banks unless the country took a bailout quickly.
“We can provide emergency liquidity only to solvent banks and … the solvency of Greek Cypriot banks cannot be assumed if an aid programme is not agreed on soon, which would allow for a quick recapitalization of the banking sector,” Asmussen told German weekly Die Zeit in an interview.
Anastasiades was to continue negotiating with Troika officials at the same time to see if the ECB will go through with its threat to cut off funding to the Cypriot banks. The President will also meet with his Cabinet.
The backup plan reportedly includes: selling of the Laiki bank for 2 billion euros ($2.6 billion) to Russia and an agreement allowing Russia to explore for natural gas reserves, along with another loan with Russia while extending the existing 2.5 billion euros loan received in 2011.  State bonds would be put up linked to natural gas proceeds.
The newspaper  Kathimerini said among the options are being discussed are making use of about 5 billion euros ($6.45 billion) in reserves held by Cyprus’s social security funds and a voluntary swap involving bank deposits and bonds indexed to the island’s natural gas revenues.
The Cyprus Central Bank was on preparing to submit new draft legislation to Parliament if government and Troika officials fail to to find an alternative proposal for raising the 5.8 billion euros that would have been raised from a tax on bank deposits.
Kathimerini Cyprus reported that an agreement has been reached in principle for Russian investors to buy Cyprus Popular Bank (Laiki) in a deal that would reduce Cyprus’ funding needs by 4 billion euros ($5.17 billion) The deal was verbal and has yet to be signed, sources told Kathimerini. A government spokesman denied the report as contradictory reports and confusion reigned during the day on March 20 with Anastasiades in an emergency meeting with his Cabinet.
The island’s Orthodox Church said it is willing to put its assets, including land, at the disposal of the state. “The entire wealth of the Church is at the disposal of the country … so that we can stand on our own two feet and not on those of foreigners,” Archbishop Chrysostomos said after meeting Anastasiades, The Church of Cyprus is a major shareholder in Cyprus’s third-largest domestic lender, Hellenic Bank
In the meantime, Anastasiades was said to be considering imposing losses on foreign investors only, who hold 40 percent of the monies in Cypriot banks, and give them gas bonds as collateral for future proceeds. Residency permits would also be offered to those foreigners living in the country with deposits, although many are outside.

Kathimerini reported that Sarris would meet Russian Finance Minister Anton Siluanov and ask Moscow to extend the maturity of an existing 2.5-billion-euro loan, due in 2016, by five years. It is also asking for the 4.5 percent interest rate to be reduced.
Russia was said to be seeking other compensationIt is likely the Russians will seek some form of compensation for such an investment. A naval port in Cyprus for the Russian fleet and access to the country’s natural gas reserves are among the rewards Moscow might seek.

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