Cyprus took the unprecedented step on Monday of closing its banks until Thursday as officials scrambled to renegotiate the terms of a controversial bailout that threatens to force savers to take a €5.8bn (£5bn) hit to their deposits.
Finance ministers from the 17-country eurozone were holding an emergency video conference call amid recriminations over the aid package, particularly in Moscow, where a spokesman for Vladimir Putin attacked the plan as "unfair, unprofessional and dangerous".
Thousands of Russians have bank accounts in Cyprus, which has styled itself as a tax haven to attract international deposits into a banking system now at least eight times the size of the island's €17bn economy. Russia hinted that a separate but crucial €2.5bn loan to Cyprus could now be in doubt.
On a day of mounting uncertainty about the punitive conditions of the bailout and the impact on the banking sector:
• Britain temporarily withheld pension payments to more than 12,000 citizens who have retired to Cyprus amid concerns about the safety of the banking system. Up to 60,000 British people are thought to be affected by the proposal to penalise bank accounts to secure €10bn of aid from the eurozone.
• A vote on the aid package in the Cyprus parliament was delayed for a second day, until Tuesday, as it became clear that the bailout plan of the newly elected president, Nicos Anastasiades, faced defeat. There were reports on Monday night that he was preparing to tell eurozone ministers that he did have the votes to get the plan through.
• Stock markets fell – the FTSE 100 lost more than 100 points in early trading – before regaining losses amid speculation the raid on savers' cash would be scaled down. On the currency market the euro tumbled to a three-month low.
• European officials raced to defuse criticism that they had imposed the bank levy on a desperate nation, as the German flag was torn from its embassy in Cyprus.
• The US urged a resolution that was "responsible and fair and ensures financial stability".
Banks in Cyprus had been due to close for a normal holiday giving the authorities an extra 24 hours after the bailout was agreed in the early hours of Saturday – but they will not now reopen until Thursday. Demonstrating their anger at the impact on their savings, hundreds of Cypriots cut short traditional family picnics that mark the first Monday of Orthodox lent and gathered at the Nicosia parliament to protest.
Politicians continued talks behind closed doors on what changes could be made to the proposals before the parliament meets on Tuesday afternoon. Anastasiades has warned that an agreement must be reached if Cyprus is to avoid the collapse of one or all of its banks.
UPDATE 1: Cyprus's parliament Tuesday rejected a controversial bank deposit levy—a
precondition for receiving a €10 billion bailout—effectively tearing up the
four-day old loan deal the country had negotiated with European and
international creditors that it needed to stave off default and a looming
meltdown in its financial sector.
The stock market’s reaction to the Cyprus banking crisis
is appearing to many as a case of wilful denial.
The vote, coming after days of fraught political talks in the Cypriot
capital, means that a new deal—if one is possible–will have to be reached in
days or Cyprus could face a complete collapse of its banks, an event that many
analysts fear could also send the tiny island nation hurtling out of the
eurozone.... In a conference call Monday night, euro-zone finance ministers were
given "no heads up" on the new rate, a European official said. "They are
playing poker." A second official confirmed that ministers and other European
officials involved in the bailout talks hadn't been informed about the new tax
plan by Nicosia. Apart from sparing small savers with less than €20,000, the
draft bills sticks to tax rates that had been agreed Saturday morning at an
emergency meeting in Brussels. European officials stressed Monday night that
there was no flexibility on the €5.8 billion target. Euro-zone finance ministers
did release a statement that allowed Nicosia to treat small savers differently,
but stressed that the overall bailout from the euro zone and the IMF couldn't
exceed the agreed €10 billion. But in his remarks to lawmakers, Mr.
Demetriades said that Cyprus's central bank wasn't prepared for the deal that
had been hammered out between euro-zone finance ministers, the European Central
Bank and the IMF after a 10-hour meeting that ended early Saturday. "The
measure is unprecedented. We didn't expect this development and we were
surprised Saturday morning and found out after," he told lawmakers.
Update 2 :The European Central Bank has just released a statement, saying that it remains committed to providing liquidity to Cyprus's banks 'within the existing rules' Here's the statement: The ECB takes note of the decision of the Cypriot parliament and is in contact with its troika partners. The ECB reaffirms its commitment to provide liquidity as needed within the existing rules. There are fears that the ECB could pull the plug on the country's two biggest banks, by terminating the support provided under its Emergency Liquidity Assistance -- on the grounds that they could be insolvent. Cyprus could be gambling that the ECB won't risk turning the liquidity tap off: During Friday's marathon negotiations over the current bailout proposal, ECB executive board member Jörg Asmussen made clear to President Nicos Anastasiades that failure to agree on a deal that weekend would make it impossible for the ECB to provide a further extension of ELA since ECB rules don't allow national central banks to lend to insolvent banks. But any actual decision to withdraw ELA is a matter for the ECB's Governing Council and requires two-thirds of the council's members to vote in favor.
Update 3 :In fact, there are really only two plausible scenarios: somebody - be it Europe or the IMF - gives Cyprus more money, in which case there is a chance that the crisis can be contained. Or Germany and the other hardline euro zone countries can insist that the deal is non-negotiable. In which case, the banks in Cyprus will go bust, risking widespread turmoil.
Given the precarious euro zone economy and the enfeebled state of European banks, cutting Cyprus a better deal looks like the safer option. The package could be restructured so that only deposits in
excess of €100,000 were taxed, the preferred option of Christine Lagarde at the IMF. Sparing those with savings of less than €100,000 from any pain would require the bigger depositors to pay a 15.5% tax to find the €5.8bn demanded of Cyprus. Alternatively, Europe could
easily find the extra €5.8bn itself.
excess of €100,000 were taxed, the preferred option of Christine Lagarde at the IMF. Sparing those with savings of less than €100,000 from any pain would require the bigger depositors to pay a 15.5% tax to find the €5.8bn demanded of Cyprus. Alternatively, Europe could
easily find the extra €5.8bn itself.
The problem is that both options will cause political problems. Putin will bridle at suggestions that Russian citizens - who make up a large proportion of the €100,000 depositors - should be singled out. And Merkel could expect an almighty domestic backlash if she backtracked from the tough stance she adopted at the weekend. But the alternative is to let the banks in Cyprus go bust as soon as they are reopened after the extended bank holiday and hope that it really is a “special case”. That looks like an awfully big gamble.
Update, the report that Cyprus's banks might not open until next Tuesday comes from Dow Jones Newswires, which also has information that capital controls might be imposed to prevent cash leaving the country (sorry I don't have more info than that yet)
7 comments:
All that Cyprus needs to do is start printing new Cypriot POUND or whatever they used and fix the exchange rate at parity to the euro.
Then print, first to fully capilaise the banks , second to pay at parity all loans to the ECB, paid in full using the new drachma.
Fixing the rate is as easy as it was for Switzerland .
Then let if fall gently as the Island gets back on its feet.
It wont be easy but taking the tainted filthy ponzi shilling of the criminal scum in Brussels is the worst option by far,
Then stick two fingers up at the mad cow in Germany and do a deal with the Russians or whoever to develop the oilfields and gas fields..
Couple of years the French will be clamoring to buy the new currency and deposit in the safest banks in Europe
Cyprus used to be English territory !
China-Russian ties to be boosted
Updated: 2013-03-20 01:45
By ZHOU WA (China Daily)
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China and Russia are expected to sign a series of agreements during President Xi Jinping's visit to Russia, which will turn the solid China-Russia political ties into practical cooperation projects.
Russian Ambassador to China Sergei Razov briefed reporters on Tuesday ahead of Xi's visit — his first foreign trip as China's president — to Russia on Friday.
During the visit, Xi will sign a joint statement, setting the direction of the development of China-Russia ties, identify the main fields of cooperation and discuss the two countries' stances on international affairs, Razov said.
There are more than 20 detailed agreements to be reached during Xi's visit, and officials and business representatives from both countries are currently in final negotiations, according to Razov.
As for the outside attention paid to bilateral energy cooperation, Razov said government officials are engaged in close negotiations and four main documents are being discussed.
The ambassador said both countries have made great progress on key negotiations.
Top executives from Russian energy companies have recently visited China, and company heads from Chinese energy giants PetroChina and Sinopec are part of Xi's high-ranking delegation.
China and Russia have enjoyed healthy political ties thanks to the exchange mechanisms between officials and the ruling parties of the two countries.
China and Russia have the same or similar positions on many international issues such as UN Security Council reform, global economic governance, climate change, food security and energy security.
There is a consensus between Chinese and Russian political observers that the China-Russia economic ties are not as good as political relations.
The trade volume between China and Russia is relatively small, compared with those between China and the United States or Europe, said Niu Jun, a professor of international affairs at Peking University.
There are structural problems in China-Russian trade, because the trade spectrum is not wide enough, and it will take time to solve these problems, Niu said.
China-Russian ties to be boosted
Updated: 2013-03-20 01:45
By ZHOU WA (China Daily)
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China and Russia are expected to sign a series of agreements during President Xi Jinping's visit to Russia, which will turn the solid China-Russia political ties into practical cooperation projects.
Russian Ambassador to China Sergei Razov briefed reporters on Tuesday ahead of Xi's visit — his first foreign trip as China's president — to Russia on Friday.
During the visit, Xi will sign a joint statement, setting the direction of the development of China-Russia ties, identify the main fields of cooperation and discuss the two countries' stances on international affairs, Razov said.
There are more than 20 detailed agreements to be reached during Xi's visit, and officials and business representatives from both countries are currently in final negotiations, according to Razov.
As for the outside attention paid to bilateral energy cooperation, Razov said government officials are engaged in close negotiations and four main documents are being discussed.
The ambassador said both countries have made great progress on key negotiations.
Top executives from Russian energy companies have recently visited China, and company heads from Chinese energy giants PetroChina and Sinopec are part of Xi's high-ranking delegation.
China and Russia have enjoyed healthy political ties thanks to the exchange mechanisms between officials and the ruling parties of the two countries.
China and Russia have the same or similar positions on many international issues such as UN Security Council reform, global economic governance, climate change, food security and energy security.
There is a consensus between Chinese and Russian political observers that the China-Russia economic ties are not as good as political relations.
The trade volume between China and Russia is relatively small, compared with those between China and the United States or Europe, said Niu Jun, a professor of international affairs at Peking University.
There are structural problems in China-Russian trade, because the trade spectrum is not wide enough, and it will take time to solve these problems, Niu said.
In parallel talks in Nicosia and Moscow, Cypriot officials tried to broker a three-way agreement aimed at rescuing the country, but without having to resort to a bank-deposit levy that euro-zone and International Monetary Fund officials have insisted on, which Cyprus's parliament snubbed in a vote on Tuesday.
Cyprus's counterproposals include tapping the country's pension-fund assets, restructuring and selling the island's two biggest banks, and offering Russia a sweetheart deal to the island's natural-gas reserves in exchange for a multibillion-euro loan.
By rejecting that offer Tuesday, Cyprus appeared to be engaged in a game of high-stakes brinkmanship.
"It would be suicidal for both sides if no agreement is reached; this would be a lose-lose situation," said Miranda Xafa, at EF Consulting, an Athens-based financial consultancy.
Preparing for the worst, Cyprus's parliament is expected to convene Thursday to discuss two pieces of legislation to cope with a potential financial-sector collapse. The first would impose emergency capital controls to prevent a flood of cash rushing out of the country when the banks reopen. On Tuesday, the country's central bank governor warned that at much as 10% of banking deposits could flee when banks reopen, but some analysts said that could be higher. The second piece of legislation would set rules for closing insolvent banks.
European Commission President José Manuel Barroso is due to visit Moscow Thursday for scheduled talks, but without the EU's top economics official, Olli Rehn, who canceled his trip because of the crisis in Cyprus. A spokesman for Mr. Rehn said Cyprus isn't on the official agenda, but will be discussed if raised by Russian officials.
Speaking to lawmakers in the European Parliament Wednesday, European Council President Herman Van Rompuy urged a quick resolution. "The current, highly uncertain situation is highly damaging, especially for the people of Cyprus, and has to be addressed as soon as possible," Mr. Van Rompuy said. "We are all very concerned and of course I am following developments closely."
So too are many Cypriots. In the island's capital, residents were glued to televisions, radios and smartphones Wednesday as they tracked the dual talks that would determine the country's future. There was a palpable sense of suspense in the air.
Key event
If the ECB does pull the plug then there could be turmoil in Cyprus next Tuesday, when the banks were scheduled to finally reopen.
And the deposit guarantee scheme which is meant to protect depositors in the event of a bank collapse could quickly be proved worthless.
As Frances Coppola (a former banker) has blogged about here, deposit guarantee schemes are only as good as the national government who stands behind them. And Cyprus does not appear to have the assets to hand to cover the deposits in its banking sector:
So, Coppola explains:
It is time that depositors were told the truth. The lack of a common deposit insurance scheme in the Eurozone means that deposit insurance is a luxury available only to those countries that can afford it - which are also the countries that least need it. Everywhere else, it is a sham.
Potentially awful news for Cypriots, as well as thousands of ex-pats from the UK and beyond.
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