Cyprus Has 4 Days To Create New Plan To Avoid Bankruptcy, European Central Bank Warns

European Central Bank CyprusHuffington Post – by MENELAOS HADJICOSTIS and ELENA BECATOROS

NICOSIA, Cyprus — Cypriot politicians moved Thursday to restructure the country’s most troubled bank as part of a broader bailout plan that must be in place by Monday to avoid financial ruin. Concerned customers rushed to get cash from ATMs as bank employees protested.

Cyprus has been told it must raise 5.8 billion euros ($7.5 billion) if it is to receive 10 billion euros ($12.9 billion) from its fellow eurozone countries and the International Monetary Fund. If it does not find a way by Monday, the European Central Bank said it will cut off emergency support to the banks, letting them collapse.  

That would throw the country into financial chaos and, ultimately, cause it to leave the eurozone, with unpredictable consequences for the region.

Several new bills were being submitted to Parliament Thursday night, including restructuring the banking sector, setting up an “Investment Solidarity Fund” and restricting banking transactions in times of crisis.

Together, they will make up at least part of the alternative plan Cyprus hopes will secure it bailout money. The lawmakers said the bills would be discussed and potentially voted on Friday morning.

The pressure has increased since Parliament on Tuesday rejected an earlier proposal to seize up to 10 percent of people’s bank accounts. Banks have been shut since last weekend to avoid a run and will not open until Tuesday at the earliest.

Uncertainty was growing among Cypriots as the deadline approached and it became clear that the country’s second-largest bank, Laiki or Cyprus Popular Bank, would be restructured.

Queues of 40 to 50 people formed at Laiki ATMs, which responded by capping daily withdrawals at 260 euros ($340) per person from 700 euros ($906). Although ATMs have been functioning, many often run out of cash.

“We need cash. We have families, children, grandchildren and expenses, and the banks have been closed since Saturday,” said Andri Olympiou after withdrawing money from a Laiki branch in Nicosia, the capital.

The central bank governor, Panicos Demetriades, urged lawmakers to vote immediately on a legal framework bill to rehabilitate Cyprus’s banking sector.

The bills include restructuring Laiki, a move that would raise an estimated 2 billion euros out of the total 5.8 billion euros Cyprus needs, according to local media.

Once it is done, the country would be in a position to guarantee all deposits up to 100,000 euros ($130,000) – the EU-wide limit for bank guarantees.

Officials said the restructuring would split Laiki into two, with a “bad bank” taking over its soured investments, and a “good bank” retaining the healthy ones.

Setting up a bad bank is a strategy that’s been used before in Europe’s financial crisis, by Ireland and Spain. A bad bank is tasked with recovering as much money as possible from the investments.

Without the restructure, Laiki would collapse and drag down the rest of the banking system and the economy, Demetriades said.

“The restructuring constitutes a significant step toward the achievement of an economic support agreement for the Cyprus Republic from the European support mechanism and the International Monetary Fund,” he said.

But the bank’s acting CEO, Takis Phidias, opposed the restructuring, saying it would do more damage than good.

“It would mean Laiki being transferred to a new bank, an existing one, with only deposits of 100,000 or under going into a good bank, while 6 billion euros in loans would be frozen, most of them would be lost,” Phidias said.

“Who would pay the loans, frozen assets?” he questioned. “This would crush confidence in the banking sector and hurt the retail sector.”

“We urge parliamentarians not to accept this restructuring plan, and instead enter into renegotiations with the Eurogroup to raise the necessary funding,” he said.

Laiki bank employees protested and scuffled with riot police outside Parliament, chanting “Cypriots wake up! We’re not selling Cyprus!”

Besides the restructuring, the “Plan B” will also likely include some form of Russian help, dipping into pension funds and taking up an offer from Cyprus’ wealthy Orthodox church to contribute. Some form of tax on bank deposits is also possible.

The “Investment Solidarity Fund” is intended to appeal to “the patriotism of Cypriots” and draw on contributions from ordinary Cypriots, businessmen and foreign investors.

The fund would include revenue from Cyprus’ newfound off-shore gas deposits, bonds and securities the fund would issue and the “obtaining, managing and issuing” of those issues by other companies and legal entities, the draft bill said – which could include pension and provident funds.

Other sources of revenue are listed as donations or contributions from individuals or companies or “any other source.”

A “Plan B” is needed after lawmakers soundly defeated the earlier proposal to seize up to 10 percent of all domestic deposits to raise the 5.8 billion euros.

“We will have a program of support for Cyprus by Monday,” Demetriades said earlier in the day.

Bank of Cyprus, another major lender, appealed to the government and politicians to reach a plan that the eurozone partners would accept, clearing the way for the bailout.

“The Cypriot economy is in a marginal and fragile state. The next move could prove salutary or disastrous,” the bank said in a statement. “It is imperative we immediately proceed with the drawing up of an agreement with the Eurogroup.”

Russia is likely to pitch in. Nearly a third of the 68 billion euros ($88 billion) in deposits in Cyprus’ oversized banking sector are held by Russians.

Cyprus’ finance minister, Michalis Sarris, has been in Moscow since Tuesday seeking to forge a deal. Russia’s help would not be a loan, but rather some form of an investment, he said.

Russia news agency ITAR-Tass quoted Sarris as saying “we are discussing the subjects of gas, bank cooperation and other subjects.” Cyprus has recently discovered significant off-shore gas deposits, and major energy companies have shown an interest in tapping those resources.

In Brussels, the head of the 17-nation eurozone’s finance ministers, Jeroen Dijsselbloem, said that a one-time tax on bank deposits was “inevitable” given Cyprus’ oversize financial sector. He argued, however, that the burden should be shifted toward taxing big bank deposits of more than 100,000 euros.

____

Petros Giannakouris in Nicosia, Juergen Baetz in Brussels, David McHugh in Frankfurt and Jim Heintz in Moscow contributed to this report.

http://www.huffingtonpost.com/2013/03/21/european-central-bank-cyprus_n_2922737.html

2 thoughts on “Cyprus Has 4 Days To Create New Plan To Avoid Bankruptcy, European Central Bank Warns

  1. As of 11 minutes ago, the Russians deal fell through

    Cyprus to vote on new plan, Europe skeptical
    By MENELAOS HADJICOSTIS and ELENA BECATOROS | Associated Press – 11 mins ago

    NICOSIA, Cyprus (AP) — Cypriot lawmakers are due to vote Friday on a raft of new measures they hope will qualify the country for a bailout package and avoid financial ruin next week. But officials in Brussels and Berlin gave no indication it would be enough.
    Cyprus needs to find a way to raise the 5.8 billion euros to qualify for 10 billion euros in rescue loans from other eurozone countries and the International Monetary Fund.
    The plan needs approval from eurozone and IMF and that remained elusive. Eurozone officials said they had not seen all the details and would have to discuss whatever final plan Cyprus presents.
    “The next few hours will determine the future of this country,” said government spokesman Christos Stylianides.
    Cyprus has had to come up with the new plan after lawmakers rejected a scheme that would have seized up to 10 percent of people’s bank deposits.
    The country needs to have the plan in place by Monday, when the European Central Bank has said it will cut off emergency support to the banks. That could trigger their collapse and devastate the economy, potentially pushing the country to leave the 17-country euro currency union.
    “We are trying very hard,” Averof Neophytou, deputy leader of the ruling Democratic Rally party, told reporters on the progress of talks. “We may have a result this day.”
    As part of the package being discussed Friday, lawmakers were considering restructuring the country’s second largest lender, Laiki, which suffered big losses on Greek debt investments.
    A large part of deposits in Laiki above the 100,000 euros ($129,000) that are insured could be confiscated. A banking official, who spoke only on condition of anonymity because the talks were ongoing, said seizures of 25-30 percent were being discussed.
    Banking officials estimate the restructuring will account for 3.6 billion euros of the 5.8 billion euros ($7.5 billion) the country needs to raise.
    Laiki bank’s acting CEO, Takis Phidias, condemned the plan. “I’m certain that there will be chaos after these bills are approved.”
    Phidias said the initial plan to seize deposits across all Cypriot accounts “would have more evenly shared the burden and certainly, it would have safeguarded both large banks. I’d like to believe that there’s still time to carry out this negotiation.
    A government official, speaking only on condition of anonymity as negotiations were on-going, indicated that a tax on deposits in other banks was also still on the table.
    The Bank of Cyprus, the country’s largest lender, said it backed the idea of confiscating some percentage of all bank deposits over 100,000 euros because there were no immediate alternatives.
    The bank warned Cypriots that “a potential collapse of the banking sector could lead to the total loss of all deposits above 100,000 euros and the immediate sale of all collateral accompanying non-performing loans.”

    Meanwhile, Cypriot efforts to clinch a contribution from Russia appeared to have failed for now. Russia is a key player in the crisis as Russian depositors have parked around 20 billion euros in the country.
    “We will only be ready to discuss various ways of support for that state only after the EU nations and Cyprus work out a final settlement,” Russian Prime Minister Dmitri Medvedev told a news conference.
    Russia’s finance minister, Anton Siluanov, said the Cypriots were seeking investment from Russian companies in a Cypriot state-owned firm that will manage revenue from the island’s newfound offshore gas. The Russian investors, however, were not interested.

    Cyprus also offered stakes in some of its banks, but there were no takers in Moscow for that, either. Siluanov also said they were not discussing providing a new loan to Cyprus as the EU has set a debt limit for Cyprus.
    Back in Nicosia, worried Laiki employees gathered near parliament for a second day to protest the bank’s restructuring, which would break the lender in two. One side would take on the soured investments to allow the stronger side to survive.
    “The bank is finished, we’ll lose our jobs and I’m worried about my kids,” Laiki employee Nikos Tsiangos said, standing behind barricades and a cordon of police that have blocked the way to Parliament. “They’ve brought us to the brink, the Europeans wanted to destroy our economy and they’ve done it.”
    The bills lawmakers were considering also included setting up an “Investment Solidarity Fund” to receive donations from the church and to pool revenue from other measures. They were also due to vote on restricting banking transactions in times of crisis.
    A vote on the laws had been scheduled for Friday morning, but was pushed back as negotiations continued.
    Separately, President Nicos Anastasiades announced there had been agreement for Greek subsidiaries of Cypriot banks to be sold, “with significant benefit for the Cypriot side,” a statement from Anastasiades’ office said.
    Europe also turned up the pressure on Cyprus. Luxembourg’s finance Minister Luc Frieden told Germany’s Inforadio that Cyprus “certainly must change a very great deal in its financial sector ….. I see among some euro states little financial room for more concessions to Cyprus.”

    http://news.yahoo.com/cyprus-vote-plan-europe-skeptical-125626579–finance.html

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