September 23, 2020

Cyprus Makes Fitful Progress on Bank Bailout Deal

Yet, with so many obstacles in the negotiations, the prospect of a default, and even a possible exit from the euro currency union, could not be ruled out.

After passing a portion of a revamped bailout agreement late Friday, the Cypriot Parliament on Saturday was still considering the rest of the package, including a tax of up to 25 percent on large, uninsured bank deposits. It was searching for an agreement before Sunday night, when euro zone finance ministers are scheduled to meet in Brussels.

Cyprus’s president, Nicos Anastasiades, was scheduled to fly to Brussels on Sunday.

All parties were working against a deadline imposed by the European Central Bank, which has said it will cut off crucial short-term financing to Cyprus’s teetering commercial banks on Monday if a bailout deal is not reached by then.

A crowd, estimated at around 2,000 people, marched toward Parliament in the early evening, far more than the hundreds who had gathered there to protest in recent days. Many were demonstrating against the imminent closure of Laiki Bank, which will cost thousands of jobs, as well as the government’s proposal to nationalize state-run pensions.

A cutoff of central bank financing and the absence of a bailout agreement could cause Cypriot banks to collapse. It could also lead to a disorderly default on the government’s debt, with unpredictable repercussions for the euro monetary union, despite the country’s tiny economy.

The central bank, the European Commission and the International Monetary Fund — the so-called troika of lenders — agreed last weekend to arrange a 10 billion euro loan, or $12.9 billion, for Cyprus if the country could come up with 5.8 billion euros of its own money. But the source of Cyprus’s contribution remains elusive. The original proposal, to impose a one-time tax on all bank deposits in the country, met with domestic outrage and international criticism, and Parliament rejected it on Tuesday.

Asked on Saturday whether Cyprus had a backup plan if a deal is not reached, a government spokesman, Christos Stylianides, said, “We are doomed to find a solution, or else everything is ruined.”

European Union leaders “may conclude that it is best to let Cyprus default, impose capital controls and leave the euro zone,” Nicolas Véron, a senior fellow at Bruegel in Brussels and a visiting fellow at the Peterson Institute for International Economics, said in a recent assessment. “But such a move would violate the promise of European leaders to ensure the integrity of the euro zone no matter what and potentially set off a chain reaction, including possible bank runs in other euro zone member states, starting with the most fragile ones, such as Slovenia and, of course, Greece.”

In a sign of how chaotic the process has become, even the timing of the meeting of the euro zone’s 17 finance ministers, known as the Eurogroup, was uncertain until Saturday afternoon, when the Dutch finance minister, Jeroen Dijsselbloem, who leads the group, said on his Twitter account that it would be held on Sunday at 6 p.m. in Brussels.

In Friday’s voting, members of the Cypriot Parliament agreed to restructure the nation’s largest and most troubled bank, Laiki Bank, by splitting off its troubled assets into a so-called bad bank. Accounts with no problems would be transferred to the nation’s largest financial institution, the Bank of Cyprus. Lawmakers also voted to require that any bank on the verge of bankruptcy be split in the same way.

They agreed to come up with a portion of the bailout money by nationalizing the pensions of state-owned Cypriot companies, even though Germany, whose political and financial clout dominates euro zone policy, has already indicated it opposes the move.

Parliament was still deciding whether to vote on Saturday or Sunday, ahead of the Eurogroup meeting, on a crucial new proposal that would skim 22 to 25 percent of bank deposits above 100,000 euros through a new tax on Laiki Bank account holders.

Another idea floated was to take at least 10 percent from uninsured deposits above 100,000 euros at all Cypriot banks.

The finance ministers and the troika on Saturday were still calculating how much money those deposit-tax alternatives would raise for the government.

“The good news is that banks were shut last week, and so depositors couldn’t cut up their money into smaller accounts to avoid any tax,” said one European Union official, who spoke on the condition of anonymity. “But it’s sure that depositors did do this before, so this needs to be assessed.”

At the insistence of the central bank, lawmakers also voted on Friday to impose capital controls to limit withdrawals and bank account closings once Cyprus’s banks reopen. The current plan is to reopen them on Tuesday morning, after a nine-day emergency holiday meant to prevent a classic run on the banks.

But without a bailout, the banks would probably be unable to open.

Earlier in the week, lawmakers rejected a previous deal brokered last weekend by President Anastasiades, the Eurogroup and the troika. “If it had been up to Anastasiades, then we’d already have an agreement,” said one European Union official, who spoke on the condition of anonymity because there may be talks with the Cypriot leader in Brussels this weekend.

The situation is “becoming critical,” the official warned, and “could end with an exit from the euro zone.”

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

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