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 Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this
    +17

    Comment number 82.

    Can someone explain why should governments allow regular businesses to go bankrupt, but not Banks?
    Why are banks a sacred cow?

    When Capitalism punishes bad business with bankruptcy, purging society of its presence, it rewards the well run competitors with market share (to their's and society's mutual benefit); Why don't we allow capitalism in our banking sector? It's working in Iceland.

  • rate this
    +16

    Comment number 47.

    Let the pack of cards collapse. Then, just like any other failed enterprise, depositors will become creditors.

    Under ECB rules, the first €100K of deposits is protected. Anything above will earn a proportional share of the residual asset. ie not a lot.

    Anyone with any sense and more than €100K uses more than one bank. If anyone has almore than €100,000 in one bank that was his choice.

  • rate this
    +13

    Comment number 110.

    I''ve made a real effort to be less reliant on my bank for making payments etc.I've shopped locally, paid in cash etc, i've withdrawn cash to pay for food and general living expenses, and guess what! i've saved some money for the first time in many years, it's not in a bank though! The Banks only remit is to make money out of us, so if you don't like that, stop letting them.

  • rate this
    +12

    Comment number 3.

    For once, somebody should let their banks go bankrupt. No floating up assets, no bail-outs, no transfer of debts from the private sector to the public, no austerity to cover for the bankers. Deposits under 100,000 euros are guaranteed by the ECB anyway - and should have been enough for a less ridiculous Plan A. If Russia wants to secure their citizens' money, they can buy the banks themselves.

  • rate this
    +11

    Comment number 196.

    It´s certainly easy to blame Germany and Mrs Merkel for everything.

    If this is so, why don´t Cyprus just leave the EU then, if they can´t stand Germany?
    This would be the only logical consequence.

 

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