March 10, 2013 8:29 pm

Cyprus to seek Greek aid to rescue banks

President Nicos Anastasiades of Cyprus will ask Athens to hand over €2bn from its own bank recapitalisation package to rescue Cypriot banks with operations in Greece, say officials in Nicosia.

The unusual request comes as Cypriot officials desperately try to avert a so-called haircut of bank deposits held on the island as part of a proposed €17bn bailout being negotiated with the EU and International Monetary Fund.

“We’re doing everything we possibly can to pull Cyprus out of crisis as quickly as possible but the road ahead is not strewn with roses,” Mr Anastasiades said before Monday’s talks in Athens with Antonis Samaras, the Greek premier.

Archbishop Chrysostomos of Cyprus, an influential political figure, urged the government not to make concessions to the EU and IMF. He said: “If they want to destroy us [through harsh demands], then we say goodbye to the euro ... We can survive with the Cyprus pound [the island’s former currency].”

Mr Anastasiades said his government would “never” agree to a haircut of bank deposits, despite pressure on the deputy leader of his Democratic Rally party to accept such a move during meetings with IMF officials in Washington last week.

Greek finance ministry officials could not be reached for comment on the Cypriot request.

A senior Greek banker who declined to be identified said: “This transfer would be hard to justify, given that there’s barely enough funding available for the Greek banks, while the economy is still deteriorating, with more non-performing loans in the system than predicted by adverse scenarios.”

Greek banks have been allocated €50bn for recapitalisation as part of the country’s latest €172bn bailout package by the EU and IMF, after incurring heavy losses on their holdings of government bonds in last year’s partial sovereign default.

Another Greek banker pointed out potential legal problems if Athens were to provide financial support for Cypriot banks.

Bank of Cyprus and Popular Bank, the largest Cypriot lenders, converted their Greek operations from subsidiaries to branch networks after the crisis erupted in 2009, making the parent bank responsible for supporting foreign operations under EU regulations.

The Cypriot bailout would include €10bn to recapitalise the island’s banks with the bulk of funding going to Bank of Cyprus and Popular Bank, which were hit hard by writedowns on Greek bondholdings as well as high levels of non-performing loans in Greece.

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