22 Mar 2013

Cyprus faces decision time – but with a gun to its head

Cyprus is confronting a grim choice – either levy 5.8bn euros from people’s bank accounts or let its banks collapse and face exit from the eurozone.

With Germany determined to put an end to Cyprus’s time as a haven for Russian money, it looks as though bank accounts worth over 100,000 euros will be hit the hardest.

Just before midday on Friday, a Cypriot government spokesman said the next few hours would determine the fate of his country. On the horizon: either a plan that can raise 5.8bn euros and secure a euro bailout, or a banking collapse and the island’s exit from the eurozone.

Speaking on Channel 4 News, Nobel prize-winning Greek Cypriot economist Christopher Pissarides (video below) pleaded for his country’s new government to be given time to see what it came up with.

It looks like blackmail from the powerful against the weak, who are trying to do everything they can to keep going within the eurozone. Christopher Pissarides

“We’ve been given an ultimatum that unless we reach a solution, some kind of solution, by Monday, there will be no more money given to the banks to carry on – and therefore the whole banking system within the economy will collapse,” he said.

He insisted that the Cypriot economy and its fiscal finances were “basically sound”. He suggested that the island’s threatened banks could be capitalised from the European financial stability facility.

Mr Pissarides said the eurozone’s reputation would not be positively enhanced as a result of the Cyprus experience. “I cannot see people looking outside and saying, ‘Yes, this is a partnership of equals who understand each other and are trying to help each other’s economy.’

“It looks more like blackmail from the big and powerful against the weak (who are) trying to do everything they can to keep going within the eurozone.”

Overnight talks

Russian Finance Minister Anton Siluanov said on Friday morning that two days of talks had yielded nothing new, adding that Russian investors were not interested in Cyprus’s offshore gas reserves or its financial sector.

Cypriot politicians need to find 5.8bn euros by Monday, the European Central Bank (ECB) has threatened, or its funds will be cut off.

A Cypriot deal on securing the funds needs to be approved by the IMF and the EU, and if reached, will guarantee a 10bn euro EU bailout deal for its ailing banks.

The talks between Mr Siluanov and his Cypriot counterpart Michael Sarris broke up overnight without even an agreement to extend an existing 2.5bn euro loan to the Mediterranean island, leaving Mr Sarris to fly home empty-handed.

He said on Thursday that the discussions also involved possible Russian investments in Cypriot banks and energy resources.

An extension of the Russian bailout loan was not discussed, Mr Siluanov added, because it would impinge on sovereign debt ratios that would determine whether an EU bailout of Cyprus was viable. “We await the decision of the EU troika (lenders), and based on that we will… take a decision on our participation in part of the debt restructuring,” he added.

Levy rejected

Cypriot politicians on Thursday ruled out the unpopular plans for a levy on people’s bank deposits during crisis talks aimed at finding the 5.8bn euros, reports said.

Instead the government hopes a central state investment fund will raise the sum demanded by the EU to guarantee a 10bn euro loan to bail out crippled banks

German Chancellor Angela Merkel told lawmakers on Friday the nationalisation of pension funds in Cyprus would not be an acceptable way of plugging a hole in its finances to qualify for an international bailout, parliamentary sources said.

Bank employees protested outside parliament on Thursday evening, chanting: “Cypriots wake up! We’re not selling Cyprus!” and riot police also stood guard and the main road was blocked to traffic, according to some Twitter users’ reports.

Increasing numbers of concerned customers continued to withdraw what money they could from ATM machines amid concerns that banks could collapse.