Race on to solve Cyprus crisis before the money runs out

A Cypriot protestor (AFP)

Cypriot politicians were locked in emergency talks with both Russia and the European Union as they scrambled to come up with a new bailout plan to save the country’s economy. The critical talks came after parliament overwhelmingly rejected a measure to dock people’s savings.

The crisis engulfing the island looked no closer to being solved as EU leaders scrambled to prevent it spreading to other eurozone countries. Frustrated business owners complained that they were running out of money and the government said banks would remain closed until Tuesday, indicating that negotiations between the President, party leaders and officials from the EU and International Monetary Fund had yet to bear fruit.

Meanwhile, the country’s finance minister spent the day in Moscow trying to convince the Russians to stump up the €5bn needed to keep Cyprus afloat and in the single currency.

European leaders signalled they would be willing to listen to any new proposals, but they were not shifting from their position that Cyprus must raise €5.8bn themselves to qualify for a €10bn bailout.

Joerg Asmussen, a negotiator from the European Central Bank, stressed that two of the Mediterranean island’s largest banks would to go bust without emergency funding, which they have threatened to withdraw. “We can provide emergency liquidity only to solvent banks and ... the solvency of Cypriot banks cannot be assumed if an aid programme is not agreed on soon,” he told German magazine, Die Zeit .

The finance minister, Michael Sarris, is hoping to find a more sympathetic ear in Moscow.

Russians are thought to hold up to 40 per cent of the deposits in Cyprus, and President Vladimir Putin has expressed outrage at the plan agreed in Brussels, which required anyone with up to €100,000 in the bank to forfeit 6.75 per cent of their savings. Those with over €100,000 would have to pay a 9.9 per cent tax. That package was rejected by parliament on Tuesday.

But there are fears that any Russian deal may come with strings attached. Nicosia has been rife with rumours that Russia might take over one of the Cypriot banks, and that Gazprom, Russia’s state gas monopoly, had offered to bail out the island in exchange for gas exploration contracts.

Mr Sarris is hoping to convince the Russians to extend an existing loan of €2.5bn. “The Cypriots are playing the Russian game in parallel,” said one EU official, adding: “The Cypriots have a fundamental choice to make, which is where they chose to go... do they go to Europe, or do they go to Russia, with all the implications that brings.”

The EU and the IMF, meanwhile, are waiting for the Cypriots to put another offer on the table.

In the meantime, banks remain closed to prevent a disorderly flow of money out of the country, and ordinary Cypriots were getting by with the few hundred euros they could withdraw from the cash machines each day. But businesses said they could not manage much longer.

The options for Cyprus – and what will happen if the worst comes to the worst...

Option 1: Renegotiate

The mechanics Cyprus is keen to avoid public outrage by taxing small deposit holders, while charges on Russia’s super-rich risks driving away the island’s big spenders. Were Cyprus able to get the troika (the ECB, the IMF and the EU) to cut the €5.8bn it has to raise itself, it would be able to propose a lower-tax deal to parliament.

How likely is it? Very low. Angela Merkel and Germany are desperate for Cyprus’s oligarchs to pay their share. The fact that no Cypriot MP voted for the savings tax suggests any taxation is unlikely to be approved. And if the troika bends too far, it risks setting a precedent. It may come down to who blinks first – would Cyprus stick to its guns and risk a disorderly default? Would Europe?

The pitfalls Continuing back-and-forth talks between Nicosia and Brussels leaves Cypriot economy on life-support indefinitely. Pass a savings tax and the potential for legal challenge is huge. The banks will have to open eventually, and the longer the stalemate goes on, the bigger the chance of a bank run when they do.

Option 2: Look elsewhere

The mechanics If you can’t raise the money yourself, then get it from someone else. Cyprus’s Finance Minister is in Moscow for talks, and the hope is that Russia doesn’t want its citizens to lose out on the say-so of Europe’s power-brokers.

How likely is it? Certainly possible. Self-interest is a powerful motivator. Cyprus also has abundant natural gas reserves which it could use as collateral. Unfortunately they won’t be on stream for another 10 years.

The pitfalls Would Europe really want Russia exerting influence over an EU member in this way? There are potential myriad problems with banking regulation and political stability if Vladimir Putin, left, has a hold on the Cypriot government.

Option 3: Go bust

The mechanics If there is no deal, the ECB could stop propping up Cyprus’s two biggest banks. If they collapse, the government cannot afford to make good on deposits. The banking system would fail, and Cyprus would be forced to ditch the euro and start printing its own. Years of turmoil follow.

How likely is it? This worst-case scenario would be a disaster for Europe, and bad for Russia. But the longer Cypriot intransigence goes on, the twitchier the ECB may get.

The pitfalls Contagion. If Europe’s other heavily indebted countries see the ECB take the nuclear option, it could spark a continent-wide bank run – and the euro meltdown that has been looming would become reality.

‘It’s always our fault’: Germany hits back

The anger felt by ordinary Cypriots against their would-be benefactors in Berlin has prompted a mixture of incomprehension, hurt pride and political mud-slinging in Germany.

Bild, a mass-circulation newspaper, carried a picture of Cypriots with placards depicting Angela Merkel as an SS officer and the slogan: “Merkel, your Nazi cash is bloodier than any laundered money.”

“It’s always the Germans … we pay the most but we are the bogeymen all the same,” the paper wrote in a reference to Germany’s 27 per cent contribution to the €10bn rescue fund Cyprus could receive, if it meets the bailout conditions. Ms Merkel and her Finance Minister, Wolfgang Schäuble, denied that they were behind a plan to impose a one-off percentage levy on savings in Cypriot banks.

But Sigmar Gabriel, the leader of Germany’s main opposition group, the Social Democratic Party, said: “The Cyprus disaster bears Angela Merkel’s signature.”

Ms Merkel said she “regretted” Nicosia’s decision to reject the bailout and insisted the EU’s aim was to exact a contribution only from bank clients with over €100,000 in their accounts. “Tough negotiations with Nicosia lie ahead,” she said.

Tony Paterson