EU gives Greek Cyprus bailout ultimatum, risks euro exit

NICOSIA - Reuters

Cypriot empoyees of the Laiki (Popular) Bank cry during a protest outside the Parliament on March 21, 2013 in Nicosia. The Cyprus cabinet was meeting in crisis session today to approve a "Plan B" bailout deal with the EU and IMF, as crowds gathered outside parliament expecting the measure to be put to a vote. AFP photo

The European Union gave Greeks Cyprus till March 25 to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In a sign it was at least preparing for the worst, the Greek Cypriot government sought powers on Thursday to impose capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen following this week's shutdown.

In stark warnings earlier in the day, the European Central Bank said it would cut off liquidity to Greek Cypriot banks and a senior EU official made clear to Reuters that the bloc was ready to see the bankrupt island banished from the euro in the belief it could then contain damage to the wider European economy.

The ECB ultimatum came as the island's leaders struggled to craft a "Plan B" to raise the 5.8-billion euro contribution demanded by the EU in return for a 10-billion euro ($13-billion) bailout from the EU and IMF; angry Greek Cypriot lawmakers threw out a tax on deposits, calling the EU-backed proposal "bank robbery".

In a mark of strained relations and confusion, euro zone officials conceded on a March 20 conference call that Greek Cyprus refused to join that the situation was "in a mess".

After more talks on March 21 evening, the currency union's finance ministers urged Greek Cyprus to table a new proposal that would, Dutch chairman Joreon Dijsselbloem said, respect "the parameters defined earlier". 

As parliament convened late in the day, the government submitted a bill seeking the power to impose capital controls on banks, a type of measure unseen since before the country joined the single currency bloc five years ago.

It also proposed a "solidarity fund" that would bundle state assets, including future gas revenues, as the basis for an emergency bond issue, likened in a note by JP Morgan to "a national fire sale".

The speaker of parliament, Yiannakis Omirou, insisted a revised levy on uninsured bank deposits was not on the table. 
 
ECB patience flags

The European Central Bank, which has kept Greek Cyprus's banks operating with a liquidity lifeline, said the government had until Monday to get a deal in place, or funds would be cut off.

"Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks," the ECB said.

In Brussels, a senior European Union official told Reuters that an ECB withdrawal would mean Greek Cyprus's biggest banks being wound up, wiping out the large deposits it has sought to protect, and probably forcing the country to abandon the euro.

"If the financial sector collapses, then they simply have to face a very significant devaluation, and faced with that situation, they would have no other way but to start having their own currency," the EU official said.

Bank branches have been closed all week and are not due to reopen until March 26, though ATMs have continued to issue cash.

Several hundred protesters, many of them bank employees, rallied outside parliament after rumours the second-largest lender, Cyprus Popular Bank, was to be wound up.

Demonstrators chanted "Hands off the bank!" and several jostled with riot police, briefly breaking through a cordon. Greek Cyprus has so far avoided the kind of unrest seen in neighbouring Greece, the centre of the euro zone debt crisis and the origin of many of the losses undermining Greek Cypriot banks.

Until this week, the expectation in Brussels and on financial markets had been that the election of a new Greek Cypriot president in February would smooth the path to a bailout deal.

But although conservative President Nicos Anastasiades struck a deal last weekend in Brussels, it was unanimously rejected by parliament on March 19. While EU lenders, notably Germany, wanted uninsured bank depositors to help ease banks' debts, Greek Cyprus feared for its future reputation as an offshore banking haven and planned to spread the tax also to small savers whose deposits under 100,000 were covered by state insurance.

In Moscow, Greek Cypriot Finance Minister Michael Sarris said he was discussing possible Russian investments in banks and energy resources to reduce its debt burden, as well as an extension of an existing 2.5-billion-euro Russian loan. 

"The banks are the ultimate objective in any support we get, so it'll either be a direct support to the banks or the support that we get through other sectors will be channelled to the banks," Sarris told Reuters during a second day of talks with his Russian counterpart, Anton Siluanov.

He said Greek Cyprus had no plans to borrow more money from Russia and add to its debt mountain. The Russian Finance Ministry had said on March 18 that Nicosia sought an extra 5-billion-euro loan.
 
'Loans from Russia would not solve problem'
Eurogroup chairman Dijsselbloem told the European Parliament in Brussels that Moscow had informed the EU it had no intention of ploughing more money into Greek Cyprus beyond the existing loan. 

"Any other options, to go further, another loan or an investment in the banks, the Russians let us know that they are not willing to do that," he said, adding that that might change.

 But Dijsselbloem said new loans from Russia would in any case not solve the country's debt problem, and that a revised levy on larger bank deposits was also still a possibility.

"I'm not sure that this package is completely gone and failed, because I don't see many alternatives," he said.

Senior euro zone officials acknowledged in a confidential conference call on March 20 that they were "in a mess" and discussed imposing capital controls to insulate the currency area from a possible collapse of the small Greek Cypriot economy.

Greek Cyprus itself refused to take part in the call, minutes of which were seen by Reuters. Several participants described its absence as troubling and reflecting the wider confusion surrounding the island's predicament. 

EU officials believe at least some of the 5.8 billion they are demanding should come from the 68 billion euros in Greek Cypriot banks, 38 billion of which is in large deposits of more than 100,000 euros, mainly from Russians and other foreigners.

While the proposal to hit small savers caused outrage, the Greek Cypriot government fears that foisting too big a burden on large depositors would wreck the offshore financial industry that accounts for much of the country's economy.

Among the other options, nationalising pension funds of semi-public companies could yield between 2 billion and 3 billion euros. Issuing bonds linked to future natural gas revenue is problematic because pumping any gas is years away.