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Cyprus Thriller Goes On

Cyprus_bank2The European Union has given Cyprus until March 25 to raise 5.8 billion euros ($7.5 billion) to secure a bailout from international lenders or face the collapse of its banking system and economy and being pushed out of the Eurozone.
After rejecting demands to confiscate up to 9.9 percent of bank deposits to trigger a 10 billion euros ($13 billion) bailout, the Cypriot government has been desperately trying to find an alternative solution to devise a scheme that would bring in the additional revenues needed to stave off a default.
The European Central Bank, which along with the EU and International Monetary Fund (IMF) makes up the Troika that offered the bailout, said  it would cut off liquidity to Cypriot banks and a senior EU official told Reuters that the Eurozone would let Cyprus go under in the belief the default could be contained without jeopardizing the financial bloc.
In Brussels, a senior EU official told Reuters that an ECB withdrawal would mean Cyprus’s biggest banks being shut down wiping out the large deposits it has sought to protect, and probably forcing the country to abandon the euro. Deposits are guaranteed only up to 100,000 euros, some $130,000.
“If the financial sector collapses, then they simply have to face a very significant devaluation and faced with that situation, they would have no other way but to start having their own currency,” the EU official said.
Several hundred protesters, many of them bank employees, rallied outside Parliament after rumors that the island’s second-largest lender, Cyprus Popular Bank, was to be wound up. The central bank issued a swift denial.
Demonstrators chanted “Hands off the bank!” and several jostled with riot police, briefly breaking through a cordon. Cyprus’s central bank governor said he expected to clinch a financial support package by March 25. He did not say how.
Bank of Cyprus, the country’s largest lender, issued a statement pleading with the political leadership to strike a deal “to save the Cypriot economy.”  The Chairman of the Eurozone Jeroen Dijsselbloem, told the European Parliament in Brussels that Moscow had informed the EU it had no intention of ploughing more money into Cyprus beyond the existing loan.
“Any other options, to go further, another loan or an investment in the banks, the Russians let us know that they are not willing to do that,” he said, adding that that might change. Dijsselbloem said new loans from Russia would in any case not solve the country’s debt problem, and that a revised levy on larger bank deposits was also still a possibility. “I’m not sure that this package is completely gone and failed, because I don’t see many alternatives,” he said.
Austrian Finance Minister Maria Fekter told the newspaper Oesterreich: “I cannot rule out a Cyprus insolvency.” With the Cypriot government scrambling desperately to find a way to raise 5.8 billion euros ($7.5 billion) to get a 10 billion euros ($13 billion) bailout from international lenders to keep its economy from collapsing, Eurozone officials were reported to be “in a mess” over how to handle the crisis.
The news agency Reuters said leaders of the financial bloc, whose demand for the Cypriot government to confiscate up to 9.9 percent of bank deposits was soundly rejected by the island country’s Parliament, were in a frantic conference call on March 21 trying to find a solution.
In detailed notes of the call seen by Reuters, one official described emotions as running “very high”, making it difficult to come up with rational solutions, and referred to “open talk in regards of (Cyprus) leaving the Eurozone”.
The call was among members of the Eurogroup Working Group, which consists of deputy finance ministers or senior treasury officials from the 17 Eurozone countries as well as representatives from the European Central Bank and the European Commission. The group is chaired by Austria’s Thomas Wieser.
Cyprus decided not to take part in the call, a decision that several participants described as troubling and reflecting the wider confusion surrounding the country’s predicament as newly-elected President Nicos Anastasiades, still stinging from a humiliating defeat of the tax confiscation plan he proposed after he said he would oppose it, was trying to find alternative solutions, including selling one of the state banks, getting Russia to restructure the terms of a 2.5 billion euros ($3.22 billion) loan, trying the bank tax again, nationalizing social security funds or putting up gas and oil exploration rights as collateral.
“The (Cypriot) parliament is obviously too emotional and will not decide on anything, if Cyprus does not even feel that they can attend the call it is a big problem for us,” the French representative said, according to the notes seen by Reuters. “We have never seen this.”
The news agency Bloomberg said that political leaders in Cyprus have agreed that their country should form an investment fund to raise the capital needed to agree a bailout with the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB.) The deputy leader of Cyprus’s conservative DISY party Averof Neofytou announced the agreement within a few hours of the ECB saying that it was set to cut off lending to insolvent Cypriot banks on March 25.
“We will find a solution,” said Neofytou. “We have no other choice. We are making a united effort to avoid our country’s bankruptcy and I think we will succeed.” Nicosia plans to create a fund collateralized by state assets, possibly including natural gas revenues, church property and social security fund reserves. A proposal is due to be submitted to the House of Representatives late on March 21.
A government official who declined to be named told Bloomberg that some kind of deposit tax was not being ruled out. The German representative raised the need to learn more about capital outflows from Cyprus to Russia and Britain, and emphasized that “we stand ready to find a solution immediately” as long as the parameters of the bailout agreed among Eurozone finance ministers on March 15 were respected.
F9591AA8A32EDFE0D57BD805B5171306The official also referred to the need to resolve Cyprus’s two biggest banks, both of which are close to collapse, and mentioned the possibility of Cyprus leaving the Eurozone. Cypriot banks remained closed until at least March 26 with officials fearing a run on the banks that could shut them down within hours.
In the event of a Eurozone the official said steps needed to be taken to “ring-fence” the rest of the bloc from the impact and to ensure there was no contagion to Greece, where there are branches of Cypriot banks also closed for now and as Greek Prime Minister Antonis Samaras is readying to meet with envoys from theTroika working with Cyprus. They want Samaras to press ahead with more tough austerity measures to keep rescue loans coming.
One issue repeatedly raised on the call was the risk of large outflows of capital once Cypriot banks reopen. The ECB representative said the situation was being closely monitored and “technical preparations” were being made to try to limit the amount of any outflow. “Some additional laws need to be passed. Overall we are in a very difficult situation,” the official said, according to the notes. “(We’re) trying to do everything within the powers to limit any unauthorized outflows.”
The ECB said it would stop providing emergency funding to Cypriot banks as of March 26 unless a solution is found but it wants the government to go back to the Parliament and insist on another version of confiscating savings. The first plan was defeated 36-0, making that unlikely with Anastasiades reeling from defeat after being in office less than a month.
Cyprus’s Finance Minister Michael Sarris continued discussions in Moscow on March 21 to see whether a way can be found to involve Russia in the bailout so that large depositors in Cypriot banks, many of whom are Russian, are not hit with a one-off levy. Financial markets have largely taken the problems in Cyprus in stride, perhaps calculating that any collapse of an economy worth only around 17 billion euros ($21.9 billion,) will have only a limited impact, or that a solution will be found in the end, Reuters added.
“Markets believe that we will find a solution and that we will provide more money and this might not be the case,” one of the participants on the call said, according to the notes. In wrapping up the teleconference, the Chairman described the situation as “foggy” and expressed concern about Cyprus’s decision not to take part in the call.
“The economy is going to tank in Cyprus no matter what,” the notes quoted him as saying. “Restrictions on capital will probably be imposed,” he said, adding that further conference calls would be organized in the coming days.
While Cypriots were jubilant that the Parliament voted 36-0 to reject a confiscation tax on savings accounts in banks to help pay for part of a bailout from international lenders, a shaken government is keeping banks closed until March 27 while they scramble to find an option to prevent a collapse of the economy.
Eurozone officials had proposed a 10 billion euros ($13 billion) bailout but only on condition that the Cypriot government seize 6.75 percent of bank deposits under 100,000 euros ($130,000) and 9.9 percent for those above that threshold, much of it held by rich Russians. The EU fears that Cyprus has been used as a money-laundering haven, including for mobsters and insisted on the confiscation scheme to insure its countries weren’t paying to bail out illicit accounts, although the tax would have hit small savers too.
Anastasiades held an emergency session of his cabinet and central bank officials trying to find another way to plug the  5.8 billion euros ($7.5 billion) hole in the bailout plan left when the Parliament gave him a setback. Analysts said he would have to consider coming back with a revised plan to still hit savings accounts, convince Russia to put up more money – perhaps in exchange for concessions such as allowing its energy giant Gazprom to conduct oil and gas exploration off the island’s coast – or try to negotiate new terms with the Troika of lenders that include the EU, the International Monetary Fund and European Central Bank.
In his comments outside the Russian Finance Ministry, Sarris denied that there had been a specific proposal of help from Gazprom, the giant Russian natural gas producer. “There were no offers, nothing concrete,” he said.
Sources close to Anastasiades rebuffed reports that Troika officials had rejected a so-called “Plan B” proposed by Nicosia to use 5 billion euros ($6.46 billion) in reserves held by Cyprus’s social security funds as well as a voluntary swap involving bank deposits and bonds indexed to the island’s natural gas revenues.
It was reported that a new proposal aims to raise 8.7 billion euros ($11.22 billion) by launching a special “code of cooperation” between Cyprus and the ECB, refinancing the old Russian loan and imposing an emergency tax on Cypriot citizens which would bring in 3.7 billion euros ($4.78 billion).
The government reportedly proposed to nationalize pension funds from state-run companies and conduct an emergency bond sale to help raise the 5.8 billion euros the indebted country needs to secure a bailout. The crisis was caused when the three major state banks overexposed themselves to devalued Greek bonds, causing a 4.5 billion euros ($5.82 billion) loss. Cypriot banks also racked up huge losses in the past several years by issuing loans to businesses in Greece that are now virtually worthless as that country is in a six-year recession.
With banks closed since March 16, authorities have ordered banks to keep automated bank machines filled with cash, but that hasn’t helped people conduct day-to-day businesses such as loans, business transactions and deposits and prevented thousands of international companies who do banking in Cyprus from transferring money between accounts.
The Church of Cyprus, one of this Mediterranean island’s biggest investors, was offering to throw its considerable wealth behind the rescue effort while ECB officials warned they would not keep liquidity coming to the country’s central bank.
Archbishop Chrysostomos II, went on television to propose putting all of its properties up as collateral so that the state could issue a new round of government bonds to raise money. The archbishop suggested that all of the Church’s dioceses, parishes and monasteries — which are also big investors — could then buy a portion of the bonds to help the country at a time of need.
Describing the church’s holdings as “huge,” without specifying a number, the archbishop said it would “put all its property is in the country’s disposal in order to support the people, avoid the banking collapse and help the country stand on its own feet.” He said Parliament had made the right decision in rejecting the original bailout terms “and sent a clear message to Europeans that they should learn to respect smaller countries.”
If Cyprus does not soon receive a financial lifeline, European officials fear that “the damage would be enormous, and the country itself would be at risk of collapse,” a source close to the discussions told The New York Times.
Russian Prime Minister Dmitri Medvedev warned that the European proposal of a tax on bank deposits could itself precipitate “a new series of local financial crises.” He said that what happens ultimately could affect relations between Russia and the EU.
British Prime Minister David Cameron said that his government had sent a plane packed with one million euros ($1.3 million) to pay British servicemen on a military base on the island along with government-appointed officials but said he could not back the holdings of scores of thousands of British citizens who live there, beyond freezing their pension transfers into Cypriot banks until the crisis is sorted out.
The UK is not a member of the 17-country Eurozone using the euro and he blistered EU officials for proposing the scheme to appropriate money right out of bank accounts, including those supposedly insured against loss by the Cypriot government. “Those deposits should be respected,” he said, although EU officials said the protection is only against loss from events such as robbery and not government-imposed double taxation schemes.
Jörge Asmussen, the ECB’s chief negotiator, warned that Cyprus’s decision to reject the terms of the bailout meant it could not guarantee support to domestic lenders for much longer. “We can provide emergency liquidity only to solvent banks and… the solvency of Cypriot banks cannot be assumed if an aid program is not agreed on soon, which would allow for a quick recapitalization of the banking sector,” he told a German newspaper.
Christian Clausen, president of the European Banking Federation, said a way had to be found to reopen Cypriot banks before it was “too late.” The EU is insisting that Cyprus confiscate part of a bailout, European Union finance ministers said they are still demanding the tax be imposed before providing any relief.
German Finance Minister Wolfgang Schaeuble, who was said to have wanted as much as 40 percent of Cypriot bank deposits to be seized, said he “regrets” the Greek Cypriot decision, and said measures had already been put in place against fallout for the rest of the Eurozone from the rejection of the bailout plan.
Schaeuble said the deposit tax was specific to the Greek Cypriot side and it would not be implemented in other states, while asserting that the proposal “remains on the table” despite its resounding rejection.
Luxembourg Finance Minister Luc Frieden urged his EU counterparts to gather immediately to prepare a new bailout package. Frieden said he respected the decision which he said would do no good to either the EU or Greek Cypriot side, and he suggested to search for alternatives.
Here’s what the Eurozone said in a statement:
The Eurogroup held a teleconference to take stock of the developments in Cyprus.
The Eurogroup stands ready to discuss with the Cypriot authorities a draft new proposal, which it expects the Cyprus authorities to present as rapidly as possible.
The Eurogroup would subsequently, on the basis of a Troika analysis that needs to be undertaken, be prepared to continue negotiations on an adjustment programme, while respecting the parameters defined earlier by the Eurogroup. After the conclusion of such negotiations the Cyprus authorities should begin legislating the elements of such an agreement.
The Eurogroup reaffirms the importance of fully guaranteeing deposits below EUR 100.000 in the EU.
The Euro area Member States continue to stand ready to assist the Cypriot people in their reform efforts and stand ready to ensure the stability of the euro area as a whole.

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