Europe

Cyprus economy 'on the brink', Bank of Cyprus warns

  • 21 March 2013
  • From the section Europe

The Cypriot economy is "on the brink" and desperately requires a liquidity lifeline from Europe, Cyprus' largest bank has warned.

"The next move may prove its salvation or destruction," said the Bank of Cyprus - itself said to require urgent funding to prevent collapse.

The European Central Bank has given the island nation until Monday to raise the funds it needs to secure a bailout.

MPs have delayed a vote on a new plan to raise those funds until Friday.

Earlier this week they flatly rejected a plan to tax bank deposits.

They need to find 5.8bn euros (£4.9bn; $7.5bn) to qualify for a 10bn-euro bailout loan from the EU and International Monetary Fund (IMF).

Political leaders discussed the options with President Nicos Anastasiades on Thursday, and the package was then discussed by the cabinet. But MPs said they needed more time to study the nine bills that make up the draft legislation.

If no "Plan B" can be found by Monday, the ECB may cut off funding to the island's banks, it said in a statement, triggering their collapse and possibly the country's exit from the euro.

After holding a phone conference on Thursday night to discuss the situation, eurozone finance ministers said they stood "ready to discuss with the Cypriot authorities a draft new proposal", which they expected "the Cyprus authorities to present as rapidly as possible".

It is now a race against time to approve the proposals by Monday, says the BBC's Mark Lowen in Nicosia, and anxiety is growing as the country - and the eurozone - enter a critical few days.

'Doomed'

The country's two biggest banks, Bank of Cyprus and Laiki, are believed to be reliant on the ECB's Emergency Liquidity Assistance, provided via the Central Bank of Cyprus.

All Cypriot banks have been shut until next Tuesday to prevent mass withdrawals, but long lines have been forming at cash machines.

They are still dispensing cash but with such demand are frequently running out, and on Thursday Laiki radically lowered the daily withdrawal limit to 260 euros.

"There are rumours that Laiki Bank will never open again. I want to take out as much as I can," retired government official Phaedon Vassiliades told AFP news agency as he withdrew cash at a machine in the capital, Nicosia.

"I have nearly 60,000 euros as savings in this bank and some credit societies. I don't know if I will ever get it back now. This is what I had and now it seems it is all gone."

"We are doomed. Our sunny days are over," said Neophytos Constantinides, an insurance company employee.

State broadcaster CyBC said employees of Laiki - the country's second largest bank - were told on Thursday afternoon the bank would be closing down, but on state radio a Laiki spokeswoman denied those reports.

On Thursday there were reports that the government was considering the restructuring of Laiki Bank into "good" and "bad" banks. Bank employees clashed with police as they protested over possible lay-offs.

Earlier crowds gathered outside parliament in anticipation of a vote on a new proposal - a key component of which is the establishment of a state "investment solidarity fund" which would issue bonds on state assets to raise the 5.8bn euros required.

Other elements of "Plan B" could include restructuring other Cypriot banks, use of pension funds, and accepting an offer of help from Cyprus' wealthy Orthodox Church.

Eurozone bailouts - graphic

A revised levy on deposits also remains a possibility.

It might also contain some kind of Russian help. Cypriot Finance Minister Michael Sarris is in Moscow discussing possible assistance.

Big Russian investors are believed to hold about a third of all Cypriot deposits - and reacted with fury when the initial plan to tax deposits by up to 9.9%.

But the chairman of the Eurogroup of eurozone finance ministers, Jeroen Dijsselbloem, told the European parliament that Moscow had indicated it was not willing to extend "another loan or an investment in the banks", Reuters news agency reported.

Reports suggest Moscow could consider buying interests in recently discovered offshore gas reserves.

But analysts point out that any revenue from such discoveries remains years off, and unnamed Turkish officials have been quoted as saying Ankara - which lays claim to some of the gas - would challenge any such arrangement.

The banking sector dominates Cyprus' economy and if a viable rescue is not organised soon the island state risks having to abandon the euro.

Cypriot banks were among the bondholders who had to take a big "haircut" in the second massive bailout for Greece.

Since 2008 the eurozone has been badly bruised by the massive bailouts provided for Greece, the Republic of Ireland and Portugal. There is a widespread reluctance to commit more EU taxpayers' money to ailing banks in southern Europe.

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