Cyprus and European Officials Scrambles to End Bank Crisis

Eight days after hashing out a bailout deal that the financial world reviled and the Cypriot Parliament unanimously rejected, the Eurogroup of finance ministers and Cyprus officials plan to meet here Sunday night with their pencils sharpened.

They face a deadline of Monday, when the European Central Bank has said that it will cut off the financing that is keeping Cyprus’s teetering banks from collapsing.

The Cypriot president, Nicos Anastasiades, flew to Brussels on Sunday after mapping out a tentative outline of a deal late Saturday with representatives of the troika of negotiators involved in the bailout: the European Central Bank, the European Commission and the International Monetary Fund.

His first order of business was a meeting with Mario Draghi, the president of the central bank; Christine Lagarde, the managing director of the monetary fund; and José Manuel Barroso, the president of the commission. Herman Van Rompuy, the president of the European Council, which represents European Union leaders, was expected to preside over the meeting. 

Mr. Anastasiades had also briefed Cypriot political leaders on the outline, which is said to call for imposing a hefty one-time tax on bank deposits above  100,000 euros, or about $130,000. Whether that will pass Parliament, whose signoff is needed, remains to be seen.

“The situation is very difficult,” the president said in a statement issued early Sunday.

The Eurogroup that will meet is the 17 finance ministers of the countries using the euro, whose taxpayers would ultimately provide the 10 billion euros, or $12.9 billion, that  Cyprus is seeking.

Traveling with Mr. Anastasiades was the deputy leader of the ruling Democratic Rally party, Averoff Neofytou;  the minister of finance, Michalis Sarris;  and the government spokesman, Christos Stylianides.

The president planned to meet in Brussels with the head of the monetary fund, Christine Lagarde, who will be participating in the meeting of the finance ministers.

Those ministers drove a hard bargain last weekend, demanding that Cyprus come up with 5.8 billion euros of its own money in order to receive the bailout.

The source of that 5.8 billion has been the sticking point ever since. As announced in the early hours of Saturday a week ago, the money would have been raised by levying a one-time tax on all depositors with money in Cypriot banks — a large portion of which is held by wealth foreigners, many of them Russian.

But that plan met a storm of criticism, because it would have hit even small depositors and seemed to violate the trust implicit in the deposit-guarantee system used throughout the euro zone in which accounts of less than 100,000 euros are supposed to be insured by the government.

The fear of an immediate run on Cypriot banks has kept the country’s banks closed since then, although they are scheduled to reopen Tuesday. The only money available to depositors has been what they can take from automatic teller machines before reaching their daily account limits. The government has ordered the banks to keep the A.T.M.s fully loaded, and lines of customers have been snaking from them sporadically throughout the week.

Still unclear is whether the banks could reopen if the European Central Bank carries out its threat to cut off short-term financing unless a bailout deal is reached.

The revised bailout terms now under discussion would assess a one-time tax  of 20 percent on deposits above 100,000 euros at one of the nation’s biggest banks, the Bank of Cyprus, which has the largest number of savings accounts on the island. Because Bank of Cyprus suffered huge losses on reckless bets it took on Greek bonds, the government appears to be taking  depositors’ money to help plug the hole.

A separate tax of 4 percent would be assessed on uninsured deposits at all other banks, including the 26 foreign banks that operate in Cyprus.

Under the plan, savings under 100,000 euros would not be touched — a significant difference from the original plan, which not only enraged Cypriot citizens but ignited fear that precedent had been set for  euro zone governments to tap insured bank savings in times of a national emergency.

Cypriot officials have also backed off a proposal that would have sought to raise billions of additional euros by nationalizing state-owned pension funds. Germany, whose political and financial clout dominates euro zone policy, had indicated it opposes the move.

President Anastasiades, a lawyer by profession and a center-right politician of the same side of European Union politics as German Chancellor Angela Merkel, was voted into office in February on the promise of reaching an effective bailout with his euro zone peers.

According to those involved in the first round of negotiations a week ago, Mr. Anastasiades was the one who pushed for the largest accounts to be subject to a tax of less than 10 percent   — a formula that meant the tax would have to hit all depositors in order to raise enough money.  The thinking was that he did not want to seem to be making a target of the wealthy foreigners who have long considered Cyprus a bank-friendly tax haven. That many of those foreigners were Russian was not lost on political observers.

In the last week, Cyprus  sought to work out some sort of side financial-support deal with Moscow, but those talks went nowhere. Russia was said to be trying to make any new support contingent on access to Cyprus’s  potentially rich offshore natural gas deposits.

The natural gas discussions provoked another geopolitically fraught aspect of the Cyprus crisis: the fact that the northern part of the island has been controlled by Turkey ever since an Athens-back coup in Cyprus in 1974. On Sunday, Turkey’s ministry of foreign affairs issued a statement warning Cyprus not to use the natural gas as collateral. Doing so, it said, would ignore “the inherent rights of the Turkish Cypriots who are co-owners of the Island.”

With Turkey bristling and Russia seemingly not a fallback option, and with the Cypriot Parliament intent on protecting small bank account holders, Mr. Anastasiades best hope now might be the revamped proposal, and the newly sharpened pencil, that he is taking to Brussels.

James Kanter reported from Brussels and Liz Alderman from Nicosia, Cyprus. Andreas Riris contributed reporting from Nicosia.

Article source: http://www.nytimes.com/2013/03/25/business/global/cyprus-and-european-officials-scrambles-to-end-bank-crisis.html?partner=rss&emc=rss