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March 21, 2013 6:55 pm
European leaders continued to turn up the heat on Cyprus to come up with an acceptable new plan to keep its banks from melting down and remain in the euro, amid signs that options other than the original €10bn plan were rapidly closing on Nicosia.
The government of Cypriot president Nicos Anastasiades was on Thursday night attempting to put together an alternative package to raise €5.8bn, but several of its elements – such as raising €2bn by nationalising the state pension fund and issuing bonds based on future revenues from offshore gas deposits – continued to be seen as non-starters by Brussels and Berlin.
Senior eurozone officials said they were intentionally allowing Nicosia to come up with its counter-proposal in the belief that Mr Anastasiades would realise he had no other options.
“It is now up to the Cypriot authorities to come up with proposals,” Jeroen Dijsselbloem, chair of the committee of 17 eurozone finance ministers who negotiated the bailout, told the European parliament on Thursday morning.
One by one, doors appeared to close on Nicosia throughout the day. The European Central Bank’s announcement that it would cut off emergency low-cost eurosystem loans to Cypriot banks on Monday put a firm deadline on the table, and the increasingly unproductive talks with the Kremlin left Mr Anastasiades with only Brussels to turn to.
“In contingency planning, every option is always there,” said one senior eurozone official involved in the talks when asked about Cypriot exit from he euro. “I do not believe it will happen, but if they do not have a programme by Monday evening agreed with us…” the official added, declining to finish the sentence.
In Brussels and Berlin, positions appeared to be hardening. The European Commission – one of the three members of the “troika” of institutions that negotiate eurozone bailouts – remained open to alternative plans, including swapping cash from the state pension funds in exchange for equity stakes in the recapitalised Cypriot banks.
But senior officials said the likelihood that any result would now lead to massive capital flight had led many lenders to consider a more hard-line “Icelandic solution” originally advocated by Berlin and the International Monetary Fund.
That plan would wind up Laiki, the island’s second largest lender, and put insured deposits under €100,000 into a new, recapitalised bank. The remaining assets, including most large deposits, would be put into a “bad bank”, wiping out as much as 40 per cent of their value.
Germany is adamant that the banking system in Cyprus must be shrunk to half its present size and Cyprus’s two largest banks restructured as part of any rescue plan.
The German view is that the two banks – Laiki and the Bank of Cyprus – are already in effect insolvent, and can be recapitalised only with a “bail-in” of their largest uninsured depositors, many of whom are foreign account holders, especially from Russia. Unlike the IMF, German officials believe only about 20 per cent of large deposits will need to be “bailed in” under the plan.
Senior EU leaders, including Olli Rehn, the commission’s economic chief, and Mr Dijsselbloem had originally expressed reservations about the plan out of fear it would lay waste to the island’s economy, which is heavily reliant on financial services.
But officials involved in closed-door discussions said many who were resistant now believe massive capital flight is assured, making the Iceland solution more palatable.
Opinions remained mixed over whether Mr Anastasiades would be able to come up with a package acceptable to the EU and his parliamentarians, who continued to resist any plan that would hit large foreign depositors, many of whom are Russian. Without a compromise deal, officials said Cypriot banks would collapse when the ECB pulled its emergency assistance, forcing Cyprus to leave the euro.
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