Search for 'Plan B' ECB Sets Ultimatum as Cyprus Moves toward Deal
Saying it cannot guarantee emergency liquidity funding to Cypriot banks beyond Monday, the European Central Bank is pressuring Nicosia to find the 5.8 billion euros needed to ward off insolvency. Leading politicians on Thursday agreed to establish a "solidarity fund" and rejected any kind of bank levy.
The streets of Nicosia were eerily calm on Wednesday evening. When the Cypriot parliament rejected the euro-zone plan to impose a forced levy on bank accounts held with financial institutions in the country, the demonstrators who gathered in central Nicosia had achieved their goal. Few seemed to be considering what might come next.
That lack of foresight was on full display on Wednesday and again on Thursday morning as Cypriot President Nicos Anastasiades sought to find funding to replace the almost 6 billion that the levy was to raise. Negotiations with Moscow are continuing, with Cypriot Finance Minister Michalis Sarris telling reporters on Thursday that his country is not seeking additional loans, preferring instead to target investments in the banking and natural gas sectors.
And the European Central Bank (ECB) heaped on pressure as well. After hinting strongly on Wednesday that it was unwilling to continue providing emergency liquidity to Cypriot banks for much longer, the ECB on Thursday issued a statement that it could not guarantee funding beyond Monday, unless a bailout deal emerges.
On Thursday, the first outlines of how such a deal might look began to come into focus. Political party leaders meeting in Nicosia with Anastasiades agreed to abandon any kind of savings account levy and instead create a "solidarity fund" bundling state-owned companies and other assets together with the public retirement fund and Cyprus Church funds. "Emergency bonds" will then be issued. How much money such a vehicle might bring in was initially unclear. A similar plan presented to euro-zone officials last week was valued at 4 billion. Cyprus must find 5.8 billion ($6.5) by Monday.
Despite the difficult negotiations, the situation has normalized somewhat for those living in Cyprus. ATM machines are filled again after a brief cash shortage earlier in the week, stores are open and restaurants and cafés in the Nicosia city center are full, even if not all of them are currently accepting debit card payments. Banks will remain closed until Tuesday, but that doesn't seem to be affecting public life for the time being.
A Milder Levy
Everyone is talking about "Plan B," the yet-to-be defined alternative to the euro-zone plan. Brussels has said it remains willing to provide emergency bailout aid of 10 billion, but Cyprus has to come up with the remaining 5.8 billion. Late on Wednesday, several politicians said on Cypriot television that a parliamentary vote could be held as early as Thursday evening -- provided that the plan finds a majority.
As it currently stands, Anastasiades' "Plan B" would call for a milder form of the savings account levy he negotiated with European leaders in Brussels. Whereas the original plan called for all savings accounts to be levied, albeit it to different degrees depending on the size of deposits, the new plan, according to some lawmakers, would only impose a one-off tax on accounts of over 100,000. Other parliamentarians reported that accounts below the 100,000 cutoff would be taxed at the low rate of 3 percent.
The original euro-zone plan had called for a 6.75 percent tax on accounts with a volume below 100,000 and 9.9 percent on larger sums. Brussels was wary of loaning Cyprus the entire 17 billion in financing it needs for fear of saddling the country with an unsustainable sovereign debt level. A 17 billion loan would be roughly equivalent to 100 percent of the country's annual gross domestic product.
Nicosia's search for an alternative funding source has proven difficult. Even if Russia were to provide the country with a substantial loan and the Cypriot Orthodox Church were to make its assets available to the state, as Archbishop Chrysostomos II offered to do on Wednesday, Cyprus would still need bailout money from the euro-zone. Moscow, however, has shown little willingness to offer a large loan, focusing instead on direct investments, the size of which remain unclear. The hectic search for additional money continues.
Anger with the Troika
Protests earlier in the week made clear that the Cypriot population would like to do without any involvement from the troika, made up of the European Central Bank, the European Commission and the International Monetary Fund. It is a goal that Anastasiades is unlikely to be able to meet, but anger with the troika among policymakers in Nicosia was growing on Wednesday as well.
One reason for the anger is the fact that the Cypriot government presented several proposals for how it could come up with its share of the bailout package without resorting to a levy on savings accounts. Government sources in Nicosia confirmed this to SPIEGEL ONLINE. One proposal was the one agreed on on Thursday -- that of creading a "solidarity fund" using state-owned assets.
Another proposal involved winding down the country's two largest banks -- both of which are in deep trouble -- and spinning off their most problematic holdings into a "bad bank" before selling the rest to the Russian bank VTB Bank, which is active in Cyprus.
The troika, however, categorically rejected the alternatives. The Cypriots' willingness to make sacrifices to rescue its banking industry was not taken seriously, say government sources in Nicosia. The conclusion of many in the country has been that, "Merkel and Schäuble want to punish us." It is a sentence, referring to the German chancellor and her finance minister, that one hears from lawmakers as well as from protesters.
Deal by Monday?
Slowly, though, the fear is growing in the country that there may not actually be a way out of the deepening crisis. People fear that the mere suggestion that a levy could be imposed on private savings accounts has irrevocably harmed the country's financial sector. The belief that money is safe in a Cypriot account has been shattered.
The only chance to rebuild the faith of foreign investors in the country -- a large share of whom are Russian -- is to increase cooperation with Moscow. That, in any case, is what many lawmakers and account holders believe.
On Wednesday evening, Anastasiades said he hoped to reach a deal with parliamentary leaders on Thursday. Cypriot Central Bank head Panicos Demetriades likewise exuded confidence on Thursday following the ECB ultimatum. "I expect a program of support for Cyprus by Monday," he told reporters.