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Under Pressure, Cyprus Lawmakers to Vote on Bailout Cyprus and Lenders at Odds on Bailout as Deadline Nears
(about 3 hours later)
NICOSIA — Under pressure from the European Central Bank to reach a deal quickly or risk a cutoff of financing for Cypriot banks, members of the Cypriot Parliament were preparing to vote Friday on yet another revamped formula for an international bailout. NICOSIA — Even as the Cypriot Parliament was gathering to consider a revised formula for a financial bailout Friday night, there were strong signals that the plan would not pass muster with international lenders.
Without lawmakers’ approval for new measures, the country will not receive the €10 billion, or $13 billion, bailout it has requested and could risk a disorderly default. And so, going into the weekend ahead of a Monday deadline imposed by the European Central Bank, it appeared there was still no immediate path to a lifeline of €10 billion, or $13 billion, that Cyprus needs to keep its banks from collapsing.
The government spokesman, Christos Stylianides, underscored the urgency of the situation. “The coming hours will seal our fate,” he said. “The country must be saved.” With the E.C.B. vowing to cut off financing for the banks unless a deal is in place, Cyprus risks a run on its banks, a disorderly default on its international debts and a potential exit from the euro currency union. Monday is a national holiday, but banks are supposed to reopen on Tuesday for the first time in more than a week, and there is widespread fear of a classic bank run, as investors of all sizes drain their accounts.
Members of the so-called troika of lenders — the International Monetary Fund, the European Central Bank and the European Commission — met Friday morning with President Nicos Anastasiades and were planning to review the new proposal, should Parliament pass it. One of the provisions before Parliament on Friday would impose new restrictions on withdrawing cash or moving money out of the country when the banks reopened. These new capital controls would prohibit or restrict check cashing and bar “premature” account closings or any other transaction the authorities deemed unwarranted.
A crowd of several hundred demonstrators massed again Friday morning in front of the Parliament building. Many angrily demanded compensation for their losses at the banks. “The coming hours will seal our fate,” a government spokesman, Christos Stylianides, said before Friday’s parliamentary session. “The country must be saved.”
With anger and anxiety growing across Cyprus, Mr. Anastasiades’s new plan would scrap a tax on bank deposits. Experts warned, however, that the deposit-tax plan might need to be revisited unless the government found other means to reach the goal of raising €5.8 billion to satisfy Cyprus’s creditors and unlock the full bailout funds. Representatives of the three main international lenders — the International Monetary Fund, the European Central Bank and the European Commission — had met Friday morning with President Nicos Anastasiades to examine the proposal he sent to Parliament, where several hundred demonstrators massed outside.
The plan sent to Parliament would nationalize pension funds from state-run companies and conduct an emergency bond sale to help raise the €5.8 billion. Gone was any reference to a deposit tax, which Parliament roundly rejected in a vote Tuesday. The revised plan scrapped a tax on bank deposits as a way to raise the €5.8 billion that the troika of lenders demanded from Cyprus as part of the bailout. But the alternative — nationalizing the pension funds of state-owned Cypriot companies — was denounced in Germany, whose political and financial clout in the euro zone tends to dictate policy.
Before concrete details emerged, German leaders made it clear they would not back a deal that involved nationalizing the state-owned companies’ pensions, a measure that is rejected in Berlin as more socially dangerous than even the original plan to tax smaller savings. A spokesman for the German chancellor, Angela Merkel, urged Cyprus to return to the bailout plan agreed to last weekend, including the deposit tax, even though Parliament roundly voted against that measure on Tuesday.
In a closed-door meeting with members of her junior coalition partner, the Free Democrats, Chancellor Angela Merkel made clear her impatience with the government in Cyprus, stating that “under no circumstances can we give up our principles,” the public television network ARD reported. “When you consider that there was massive resistance against involving the savings, then it is not easy to see how tapping the pension funds, which we view as socially a much more drastic step, is a very good idea,” Steffen Seibert, Ms. Merkel’s spokesman, told reporters.
“When you consider that there was massive resistance against involving the savings, then it is not easy to see how tapping the pension funds, which we view as socially a much more drastic step, is a very good idea,” Steffen Seiber, Ms. Merkel’s spokesman, told reporters. The suggestion of tapping pension funds triggers a visceral response in Germany, where history has proven the dangers of such ideas. German pensions were tapped to finance both world wars, and the idea remains an anathema to German leaders today.
Germany is not alone. Luc Frieden, Luxembourg’s finance minister, expressed frustration over a lack of communication in Nicosia, telling Germany’s RBB radio, “It is difficult that we are not getting any details from Cyprus.” “The German reaction to such suggestions quickly becomes emotional,” said Bernd Raffelhüschen, a professor of economics at the Albert-Ludwig University in Freiburg. “But looking at it rationally, it must be said that the German reaction is not stupid.”
The European Central Bank has told Cyprus that it has until Monday to reach an agreement with the European Union and the International Monetary Fund, if the government wants its banks to continue to receive the low-interest loans essential to keeping them afloat. Some economists said it was almost inevitable that the next draft, if one is required, would have to contain some form of deposit tax — perhaps one restricted to depositors with balances of more than €100,000, with the levy at 10 percent or higher. Smaller accounts are insured by the government, though it is unlikely that the Cypriot government could cover those guarantees.
The Cypriot central bank said the new bailout package included “consolidation measures” to enable Cyprus Popular Bank, also known as Laiki Bank, to continue operating. When euro zone finance ministers hashed out the original bailout terms last weekend, Cypriot officials had resisted limiting the tax to large accounts, evidently to avoid damaging the country’s reputation as a haven for wealthy banking clients. Many of the wealthiest citizens of Russia have euro-denominated bank accounts in Cyprus — one reason that euro zone finance ministers have taken such a hard line.
As the country’s most troubled lender, it would be reorganized by placing underperforming loans and questionable assets into a so-called bad bank and transferring healthy assets to the Bank of Cyprus, the nation’s largest financial institution. By effectively shutting down one of the banks needing support, the government would lower the large tab for supporting the banking system. Another component of the plan before Parliament on Friday was what the Cypriot central bank described as “consolidation measures” to enable Cyprus Popular Bank, also known as Laiki Bank, to continue operating.
On Friday, Greece struck a deal to take over the Greek units of Cyprus’s three main banks, a move that would reduce the bill Cyprus now foots to support the banks, and ensure that Greek savers in those banks do not get taxed on their holdings. As the country’s most troubled lender, Laiki Bank would be reorganized by putting problem loans and questionable assets into a “bad bank” and transferring healthy assets to the Bank of Cyprus, the nation’s largest financial institution. By effectively shutting down one of the banks needing support, the government would lower the large expense of supporting the banking system.
Lawmakers will also vote Friday on restrictions on taking cash out of banks and out of the country, known as capital controls, when the banks reopen Tuesday after a national holiday Monday. The bill would limit cash withdrawals, prohibit or restrict check cashing and bar “premature” account closings and any other transaction the authorities deemed unwarranted. On Friday, Greece struck a deal to have one of its biggest lenders, Piraeus Bank, take over the Greek-based units of Cyprus’s three main banks. That move was meant to relieve Cyprus of the cost of supporting those units, while ensuring that Greek savers in those banks would be insulated from whatever new bailout terms might be struck.
The authorities have ordered Cypriot banks to keep A.T.M.’s filled with cash as long as the banks themselves are closed. But that has been of little help to the thousands of international companies that do banking in Cyprus, which cannot transfer money in and out of those accounts to conduct business. The Cypriot government has ordered banks to keep automated teller machines filled with cash so long as the banks themselves remain closed. But that has been of little help to the thousands of international companies that do banking in Cyprus, which cannot transfer money in and out of those accounts to conduct business.
European authorities said on Friday that members of the troika were focused on the laws being drafted by the Cypriots to wind up failing banks and restrict flows of money out of the country. The European authorities said Friday that members of the troika were focused mainly on the laws being drafted by the Cypriots to deal with failing banks and restrict flows of money out of the country.
“The law on bank resolution that is adopted needs to be a law applicable in a generic fashion, so not a law that would be applicable in only one particular case,” Simon O’Connor, a spokesman for Olli Rehn, the E.U. commissioner for economic and monetary Affairs, told a daily news conference in Brussels. “The law on bank resolution that is adopted needs to be a law applicable in a generic fashion, so not a law that would be applicable in only one particular case,” Simon O’Connor, a spokesman for Olli Rehn, the E.U. commissioner for economic and monetary affairs, said at a daily news conference in Brussels.
Those comments seemed to suggest that troika officials want the Cypriots to be ready to shut down troubled lenders in addition to Laiki Bank, like the Bank of Cyprus, with the option of imposing significant haircuts, or losses, on large depositors. Those comments seemed to suggest that troika officials want the Cypriots to be ready to shut down troubled lenders in addition to Laiki Bank, like the Bank of Cyprus, with the option of imposing significant losses on large depositors.
Revised plans for a contribution Cyprus would make toward a bailout package, dubbed a solidarity fund, were still under the troika’s microscope. “We haven’t given any green light because we still are looking at the proposal in depth,” Mr. O’Connor said. Other officials gave assurances Friday that Cyprus could impose capital controls, probably including strict curbs on daily withdrawals and withdrawals of savings deposits, without violating European Union rules that are meant to foster flows of capital between member states.
Other officials on Friday gave assurances that Cyprus can impose capital controls — probably including strict curbs on daily withdrawals and withdrawals of savings deposits — without violating European Union rules that are meant to foster flows of capital between member states. “It’s a unilateral decision by the member state and it does not require prior approval from the commission,” Chantal Hughes, a spokeswoman for Michel Barnier, the E.U. commissioner for financial services, said at the same news conference. A country like Cyprus “can impose those restrictions as long as the criteria laid out in the treaties are met,” she said.
“It’s a unilateral decision by the member state and it does not require prior approval from the commission,” Chantal Hughes, a spokeswoman for Michel Barnier, the E.U. commissioner for financial services, told the same news conference. A country like Cyprus “can impose those restrictions as long as the criteria laid out in the treaties are met,” she said.
But she underlined that imposing capital controls was “not meant to be a never-ending situation” and that reaching an overall deal was vital.But she underlined that imposing capital controls was “not meant to be a never-ending situation” and that reaching an overall deal was vital.
Many of the wealthiest citizens of Russia, which is not in the euro currency union, have bank accounts in Cyprus — one reason that euro zone finance ministers have taken such a hard line. A delegation of Cypriot officials led by the finance minister, Michalis Sarris, remained in Moscow until Friday morning to press the case for additional aid, but there were no reports of progress, and the officials stayed out of sight.
A delegation of Cypriot officials led by the finance minister, Michalis Sarris, remained in Moscow until Friday morning to press their case for additional aid, but there were no reports of progress, and the officials stayed out of sight. The Russian prime minister, Dmitri A. Medvedev, said Friday in a joint news conference in Moscow with José Manuel Barroso, the president of the European Commission, that his country was not walking away from Cyprus.
The Russian prime minister, Dmitri A. Medvedev said Friday in a joint news conference in Moscow with José Manuel Barroso, the president of the European Commission, that his country was not walking away from Cyprus. Instead, said Mr. Medvedev, Russia would wait until a deal is done between the E.U. authorities and Cyprus before extending additional help.
Instead, said Mr. Medvedev, Russia would wait until a deal is done between E.U. authorities and Cyprus before extending additional help. “Regarding our participation in this process, we haven’t shut the doors,” Mr. Medvedev said. “Of course we’ve got our own economic interests at stake.”
“Regarding our participation in this process, we haven’t shut the doors,” said Mr. Medvedev. “Of course we’ve got our own economic interests at stake.” Additional efforts to help Cyprus will come “only after a final settlement scheme” involving the European Union, he said. Additional efforts to help Cyprus will come “only after a final settlement scheme” involving the European Union, he said.
The situation in Cyprus “is very dramatic and should be addressed as soon as possible,” Mr. Medvedev said.The situation in Cyprus “is very dramatic and should be addressed as soon as possible,” Mr. Medvedev said.
Reporting was contributed by Melissa Eddy in Berlin, James Kanter in Brussels, David M. Herszenhorn in Moscow, Niki Kitsantonis in Athens and Andreas Riris in Nicosia. Melissa Eddy in Berlin, James Kanter in Brussels, David M. Herszenhorn in Moscow, Niki Kitsantonis in Athens and Andreas Riris in Nicosia contributed reporting.