Officials were resurrecting previously discarded proposals as they attempted to avoid a financial meltdown. Almost all the back-up plans have proven unpalatable in either Nicosia, Brussels or Berlin, however, pushing Cyprus closer to a banking sector collapse that threatened to force it out of the eurozone.
One eurozone official said EU negotiators were allowing Cypriot officials to manage the fallout of Tuesday’s parliamentary rejection on their own to turn up the heat on Nicosia.
Eurozone negotiators have revived an alternative plan, originally advocated by Finland and Germany, that would merge Cyprus’ two largest banks Laiki and Bank of Cyprus. It would also create a new bank that would include all deposits of under €100,000 and a bad bank. The restructuring would mean far lower recapitalisation costs.
However, officials said Nicos Anastasiades, the Cypriot president, continued to resist the merger plan, known among negotiators as the “Icelandic solution”, since it would put large uninsured deposits into the bad bank, effectively wiping them out.
Mr Anastasiades’ continued refusal to accept any losses on large deposits, many of which are held by Russian nationals, has befuddled European negotiators, who see such “haircuts” as central to any compromise solution.
“The Cypriots are still rejecting any bank resolution that involves locking up the uninsured deposits and imposing losses on them,” said a senior official involved in the negotiations.
In case Nicosia has no alternative, Cypriot officials have been preparing a bank resolution law, since it does not have a legal structure to wind down failed banks. But the Cypriot government cancelled a parliamentary session last night that was due to debate the legislation and other emergency measures, including capital controls that some EU officials believe are indispensable for preventing massive outflows from Cypriot banks once they reopen.
All Cyprus banks have been closed since Monday, although cash machines are being refilled. The Central Bank of Cyprus said all banks would remain closed until after the scheduled holiday on March 25.
Cypriot officials said the delay in passing the legislation was because the parliament’s legal department “hasn’t finished drafting them”. But people involved in the talks said infighting among Cypriot politicians was hampering a coherent response.
“I’m confident the political leaders will do their best to save the country from bankruptcy,” said Averoff Neofytou, leader of the governing centre-right Democratic Rally party. “We will work all night to find a solution. We have to do it in hours, not days.”
At the same time, there were also signs of growing dissent among international lenders who brokered the original deal in the early morning of Saturday. The European Commission, one of the members of the so-called “troika” that negotiates eurozone bailouts, for the first time publicly acknowledged it had not fully backed the €10bn package, which would have seized €5.8bn from Cypriot bank accounts to lower the bailout’s price tag.
A commission spokesman said Olli Rehn, the commission’s economic chief, “felt the duty to support it” since other options were more damaging.
“There is no shortage of solutions: the Cypriots have a plan, the European Commission cooking something else, et cetera,” said a senior troika official involved in negotiations. “The problem is that either the plans do not add up or there is no political willingness to deliver them.”
A “Plan B” offered by the Cypriot government to raise cash by nationalising the state pension fund and issuing emergency bonds backed by future revenues from offshore gas discoveries was rejected by EU and International Monetary Fund negotiators, the Cypriot interior minister said.
Despite signs it would not be accepted by the EU, Panicos Demetriades, central bank governor, was drawing up legislation for a bond backed by future gas revenues, even though gas from the field to be used as a guarantee would only start being pumped in 2019 at the earliest.
The bond issue could raise €1.5bn to €2bn “provided that ordinary Cypriots still trust it will be repaid”, one Nicosia banker said. Another €3bn to €4bn could be raised by nationalising Cypriot state pension funds’ reserves, a government adviser said.
The deputy leader of the governing Democratic Rally party said Cyprus would again ask Greece for a €2bn loan from its €50bn bank recapitalisation scheme funded by international lenders last year. Athens was willing to help but its central bank said the Greek banks would need all the funding themselves.