Cyprus scrambles to find cash after MPs snub bailout

20th March 2013, Comments 0 comments

Debt-hit Cyprus was scrambling Wednesday to secure funding for its banks after lawmakers rejected the terms of an EU bailout deal, soliciting Russia, the church and state institutions for cash.

In an early setback for the island's "Plan B", however, Finance Minister Michalis Sarris failed to reach progress after two rounds of talks in Moscow on assistance from Russia.

And in Brussels, the European Commission warned that any new Cyprus bailout must guarantee that the island's debt burden is sustainable and must be agreed by all parties involved.

German Chancellor Angela Merkel however was supportive, telling reporters in Berlin: "Cyprus is our partner in the euro area and that is why it is our duty to find a solution together."

With the banking sector at a standstill and fears growing of a forced eurozone exit, President Nicos Anastasiades huddled with party leaders and financial experts in Nicosia trying to formulate a "Plan B" that would help the island confront its worst crisis since the 1974 Turkish invasion.

The meeting came a day after lawmakers flatly rejected a highly unpopular measure that would have slapped a one-time levy of up to 9.9 percent on bank deposits as a condition for an EU-led 10-billion-euro ($13-billion) loan.

The 5.8 billion euros the proposal would have raised was crucial to Nicosia getting the full rescue. With that now in doubt, Cyprus must find other ways to raise cash to repay its debts.

Caught between the demands of its eurozone lenders and traditional ally Russia, Cyprus is treading a very fine line, and one reason being given for parliament's refusal to accept the deposits levy was that Moscow had to be placated.

Russians -- many of them wealthy tycoons seeking to avoid taxes back home -- hold between a third and half of all Cypriot deposits and have $31 billion in private and corporate cash buried in the island's teetering banks.

Any levy on these holdings could have sparked a capital flight that would probably have collapsed the banking sector.

Cyprus's banks were left heavily exposed to the Greek debt crisis, and their failure would leave the country on the verge of bankruptcy and in danger of going into default.

Illustrating the balancing act, Anastasiades telephoned both Merkel and Russian President Vladimir Putin on Tuesday night after parliament angrily vetoed the bailout deal.

The Kremlin said that Putin and Anastasiades had discussed what Russia could do to help.

By that time the Cyprus president had already sent Finance Minister Sarris to Moscow to woo Russian assistance and seek an easing of the terms of a 2.5-billion-euro loan Moscow afforded Nicosia in 2011 that matures in 2016.

Sarris was upbeat on Wednesday after meeting his Russian counterpart Anton Siluanov before talks with First Deputy Prime Minister Igor Shuvalov about a possible new Moscow loan, describing it as a "very good beginning."

But a Russian government source told AFP that a second round of talks with Shuvalov -- a close Putin aide who oversees the financial sector -- produced no results.

Russian news reports said the talks will continue in Moscow on Thursday.

Wednesday's emergency meeting in Nicosia was attended by Central Bank governor Panicos Demetriades and a member of the troika of the European Union, European Central Bank and International Monetary Fund.

The meeting broke up after two hours to allow technical experts from the various parties to hammer out with Central Bank experts a possible "Plan B", according to government spokesman Christos Stylianides.

The Bank's deputy governor Spyros Stavrinakis said no decision had yet been taken on whether banks, which have been shut since the weekend on fears of a run on accounts, will reopen on Thursday as previously announced.

State television said one option being examined in the formulation of a "Plan B" was nationalising the provident funds of state and semi-state institutions, which could raise around three billion euros.

Another option was a shrinking of the banking sector, possibly merging the island's two biggest banks into one, so the amount of recapitalisation needed would be lower.

The head of the powerful Orthodox Church in Cyprus, Archbishop Chrysostomos II, offered to help bail the country out by putting church assets at the government's disposal.

The church is the largest landowner on the island and also has stakes in businesses including the country's Hellenic Bank, with total assets estimated to run into tens of millions of euros.

© 2013 AFP

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