Cyprus bank crisis: Mounting EU pressure

 

The BBC's Gavin Hewitt: "These are very, very difficult days"

It is possible to be lulled into thinking that the Cypriot crisis is not acute. Yes, the banks are closed but the cash machines are being refilled.

The queues for money are small. Yet beneath the surface the economy is under strain from the closed banks.

Petrol stations won't accept credit cards any longer. Restaurants want cash.

Stores won't take cheques. Businesses cannot buy or sell. Deals are not being completed. And the banks won't open until Tuesday at the earliest. Cyprus will have been 10 days without working banks.

In truth the country is surviving on a lifeline from the European Central Bank.

It is keeping at least two Cypriot banks afloat. If they collapsed the banking system would soon follow. But the ECB is running out of patience. Yesterday a senior ECB official warned that they could not continue supporting banks without them being solvent - and that cannot be assumed, said the same official.

And today the ECB said it would continuing the emergency funding of Cyprus until Monday. Thereafter the funding could only be considered "if an EU/IMF programme is in place".

The Cypriot President, Nicos Anastasiades, has underlined the urgency by saying he wants a decision "on a Cyprus rescue to be made today (Thursday) at the latest".

During the day the government will unveil what it calls its Plan B. The challenge is to find nearly 6bn euros (£5bn; $7.7bn). That is needed to trigger 10bn euros in rescue loans from the EU and IMF. Without that funding Cyprus will go bankrupt.

Tough choices

The first question is whether the new plan will still involve any levy on bank accounts. When the first deal was announced it was the raid on deposits that triggered protests.

The Cypriot government is boxed in here. If it goes after those with deposits of over 100,000 euros then that could trigger the big Russian investors withdrawing their funds. If that happens it deals a fatal blow to the Cypriot banking sector. One-third of the deposits (30bn euros) are held by Russians.

This has been the source of tension with Germany. Berlin says it cannot ask its taxpayers to bail out Cyprus if that involves protecting wealthy Russians. Chancellor Angela Merkel is insistent that they must make a contribution.

There is a bottom line for Europe's leaders. There will be no bailout unless the Cypriot debt is made sustainable. For that to happen a chunk of debt has to be written off - nearly 6bn euros of it. The original plan was to make depositors take the "haircut" - a slice from their savings. Angela Merkel also believes the banking sector is too large and also unsustainable.

In its hour of need Cyprus is looking to Russia. Under discussion: extending the pay-back term of an existing Russian loan of 2.5bn euros, made in 2011, and whether Russian could buy into a troubled bank. And if Russia plays ball it will strike a hard bargain - perhaps securing an interest in Cyprus's offshore gas industry, yet to be developed.

There are two questions which will be asked of Plan B. Will it convince the EU and IMF that it really does raise the 6bn euros which will allow the Europeans to agree to a bailout? Secondly, will the Cypriot people - angry with the EU and Germany - accept a deal which might still involve depositors being punished?

 
Gavin Hewitt, Europe editor Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this
    +2

    Comment number 40.

    We've been warned about this for some time now. This Cartel is reaching its inevitably painful conclusion, as all Ponzi Schemes do. It is a Ponzi Scheme global in proportion and unprecedented in gravity.

    "The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson..."
    ~Franklin D. Roosevelt, 1933

  • rate this
    0

    Comment number 39.

    Unfortunately membership of the euro has encouraged countries to live beyond their means and they are now suffering the consequences. (Similar conditions encouraged people in the sub-prime market to buy houses they couldn't afford which led to the credit crunch). The politicians are responsible but it's the people who have to pick up the tab.

  • rate this
    +1

    Comment number 38.

    #26 dmt

    -- Your knowledge of Cyprus and Greece is apparently Zero.

    Greece blackmailed the EU by blocking ex-communist European countries from EU membership --unless Cyprus also was permitted to join.

    -- Now all can see the consequences --

    --both Greece and Cyprus should be thrown out the EU-door --on their ears !

  • rate this
    +2

    Comment number 37.

    Cyprus will likely get its Russian salvation, backed by assigning large long-term MedGas futures. It should exit the Euro, emerge with a devalued Cyprus £ and do what many profligate countries have had to do in the past: gets its economy and finances back under control. Properly managed with strong partners and a 10 year strategy MedGas could just see Cyprus become another 'Norway' by 2023.

  • rate this
    0

    Comment number 36.

    I have NO sympathy for Cyprus.
    Why has the press portrayed the ECB solution as purely a“tax”, it involves giving depositors an equity stake in the bank in exchange for their seized deposits.
    The banks are collapsing, this is a far better deal than GB taxpayers got in 2008. If Cyprus think they will remain in the EURO, through deal that involves Russia, sympathy has run out.

  • rate this
    +3

    Comment number 35.

    The writing is on the wall...
    Bailouts for Greece, Ireland, Portugal, Spain, Italy...
    Can the 'powers that be' not see that the eurozone is failing miserably?

    There will be many more bailouts... many more problems... until someone decides to take the initiative and get rid of the DISunited States of Europe.

    Let us hope that the initiative is not taken too late!

  • rate this
    +3

    Comment number 34.

    It's not just the impact on Cypriot citizens that is gravely concerning about targeting depositors - loss in confidence in deposit securities sends shivers down the spine of the average saver across the EU and is political suicide. With a third of deposits in Cyprus being held by Russians, a withdrawal of that magnitude will collapse the banking sector making a bailout from the EU/IMF redundant.

  • rate this
    +4

    Comment number 33.

    Saying Cyprus banks have been corrupt for years seems to forget corruption of U.S banks started the downturn. That corruption went on to include almost every bank in Europe as well!
    Don't fall for EU propaganda that seeks to vilify a country before it's targeted destruction. Cyprus was pushed to buy Greek bonds by the EU. Then forced to accept a massive haircut when the EU renegotiated Greek debt.

  • rate this
    +2

    Comment number 32.

    Britain is .short of gas. Britain should buy future rights to offshore gas fields and give them the cash - it's not s huge amount. In reality only a guarantee would need to be provided. Cyprus would rather deal with Britain than Russia in any event.

  • rate this
    +7

    Comment number 31.

    28. pah500
    That's a bit harsh.

    Remember; the EU & Cypriot governments had in place a guarantee on all deposits up to €100k were 100% insured. People trusted that.

    I agree that they, and all of us, should be wiser than keeping the bulk of our savings in the banks. But, the Cypriots relied on a promise from their elected officials which may be broken now.

  • rate this
    +3

    Comment number 30.

    I think the Cypriot banking system is shortly to be no more.

    Who on earth will leave their money there when they have had a taste of what could, has and no doubt will eventually happen again.

    Why else are the banks still closed – Because they know that too, it’s not Rocket Science.

  • rate this
    -10

    Comment number 29.

    Why do I get the feeling that this crisis has been made in America and is really about the new cold war between US & Russia?
    After all, the EU and US are negotiating a free-trade agreement, & this gives US clout it ought not to have where EU matters are concerned.

  • rate this
    -3

    Comment number 28.

    Walt78
    Just now
    25. Walt78
    Maybe you have been living on a desert island because this crisis has been raging for YEARS and I have no sypathy for anybody stupid enough to still have money in a bank apart from for day-to-day bills etc. It's been blindingly obvious since 2008 that the whole thing (sterling/dollar/euro etc) has to collapse.

  • rate this
    +3

    Comment number 27.

    In a Capitalist economy, a Bank is just like any other business:
    If it succeeds, it should be able to keep its profits and reward its investors; &
    If it fails, it and its investors alone should shoulder the losses.

    We need to restore capitalism: Let bad banks fail, rewarding sounder competitors who fill the void, as it is in Iceland.

    "Let banks fail"
    ~Olafur Ragnar Grimsson, President of Iceland

  • rate this
    -2

    Comment number 26.

    @16
    So you think the German strategy is to pick a country that can't fight back, and make an example of it, destroy it, so that all the other member states will know exactly where they stand?

    The strategy relies on two things. First, the other smaller states must be driven by fear, not by consensus of their people. Second, nobody notices that you pick on the weak, because that is all you have.

  • rate this
    +2

    Comment number 25.

    21.pah500

    Easy enough to say, so long as it isn't the bank that you have all your savings, investments & pension with

    - Serves you right for supporting ponzi scheme (fiat money). Get your money out whilst you can & buy GOLD

    It isn't my money it is the Cypriots we are talking about & I don't know if you have been living on a desert island the last week but they CAN'T move their money

  • rate this
    +1

    Comment number 24.

    An Iceland solution: let the banks go bust; depositors will get a maximum of €100,000, the rest is going to be sucked away in its entirety. The Russians (and the British expats, I'm afraid) will lose a lot of money, but those are the rules of the game for the over-100,000.
    But then, what next? Cyprus will have to be aided, because it won't be able ot live on its banks any more. Too bad for them.

  • rate this
    +1

    Comment number 23.

    Government employees in Cyprus get a payoff along with their pension that can amount from 50-200 thousand! Euro based on their position which is tax free. HMMMM!!!!!

  • rate this
    0

    Comment number 22.

    I fail to see now ´Nationalizing´ a semi-government pension fund is anything but another Cypriot (Greek) trick --the funds are not in cash add not under ECB control.

    If bonds are issued with the fund as collateral --when push comes to shove --Cypriots will just not pay --and steal the 10 Bln. (as planned?)

    -- They cannot and should not be trusted.

    --they and Greece must leave the EU and Euro

  • rate this
    0

    Comment number 21.

    8.Walt78
    23 Minutes ago
    3.sotos_68

    "For once, somebody should let their banks go bankrupt"

    Easy enough to say, so long as it isn't the bank that you have all your savings, investments & pension with

    - Serves you right for supporting this ponzi scheme (fiat money). Get your money out whilst you can and buy GOLD

 

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