Cyprus faces last ditch chance to save economy

NICOSIA Sun Mar 24, 2013 9:26pm IST

1 of 3. Lawmakers participate in a parliamentary session in Nicosia March 22, 2013.

Credit: Reuters/Yorgos Karahalis

NICOSIA (Reuters) - Cypriot President Nicos Anastasiades embarked on last-minute crisis talks with international lenders on Sunday in an attempt to save the Mediterranean island from financial meltdown.

With Cyprus facing a Monday deadline to avert a collapse of its banking system and potential exit from the euro, late night negotiations in Nicosia to seal a bailout from the EU and International Monetary Fund broke up without result.

Anastasiades then headed to Brussels in a private jet sent by the European Commission to hold talks with EU, European Central Bank and IMF leaders ahead of a crunch meeting of euro zone finance ministers at 6 p.m. (1700 GMT).

The president and his team have a "very difficult task to accomplish to save the Cypriot economy and avert a disorderly default if there is no final agreement on a loan accord," the spokesman said.

Underlining the gravity of Cyprus' position, the EU's economic affairs chief Olli Rehn said there were now "only hard choices left" for the latest casualty of the euro zone crisis.

French Finance Minister Pierre Moscovici put it more bluntly: "To all those who say that we are strangling an entire people ... Cyprus is a casino economy that was on the brink of bankruptcy," he told Canal Plus television.

Fears have been expressed that the problems of Cyprus could cause a wider financial market sell-off, but the island's small size - it accounts for just 0.2 percent of the eurozone's economic output - has led other experts to forecast that contagion will continue to be limited.

ANXIOUS MOOD

In the capital, Nicosia, the mood was anxious.

"I haven't felt so uncertain about the future since I was 13 and Cyprus was invaded," said Dora Giorgali, 53, a nursery teacher who lost her job two years ago when the school she worked at closed down.

"I have two children studying abroad and I tell them not to return to Cyprus. Imagine a mother saying that," she said as she sipped an ice cold coffee in a central Nicosia square. "I think a solution will be found tonight but it won't be in the best interests of our country."

After negotiations ended in the early hours of Sunday morning in Nicosia, the government issuing a statement saying talks with international lenders were at "a very delicate phase" and deadlines were very tight.

The government's tone jarred with earlier expressions of cautious optimism during days of intense negotiations between Cypriot leaders and officials from the island's "troika" of international lenders, the EU, IMF and European Central Bank.

Cyprus' overgrown banking sector has been crippled by exposure to crisis-hit Greece, and the EU says the east Mediterranean island must raise 5.8 billion euros on its own before it can receive a 10 billion euro bailout.

Without a deal by the end of Monday, the ECB says it will cut off emergency funds to Cypriot banks, spelling certain collapse and potentially pushing the country out of the euro.

Conservative leader Anastasiades, barely a month in the job and wrestling with Cyprus' worst crisis since a 1974 invasion by Turkish forces split the island in two, is expected to meet the heads of the EU, the European Central Bank and IMF in Brussels.

Scrambling to find the funds, officials said Cyprus had conceded to a one-time levy on bank deposits over 100,000 euros, a dramatic U-turn from five days ago when lawmakers angrily threw out a similar proposal as "bank robbery".

A senior Cypriot official said Nicosia had agreed with its lenders on a 20 percent levy over and above 100,000 euros at the island's largest lender, Bank of Cyprus BOC.CY, and four percent on deposits above that level at other troubled banks.

'ONLY HARD CHOICES LEFT'

Finance Minister Michael Sarris spoke of "significant progress" in talks on Saturday, as angry demonstrators outside the finance ministry chanted "resign, resign!".

In a stunning vote on Tuesday, Cyprus's 56-seat parliament rejected a levy on depositors, big and small, and Sarris spent three fruitless days in Moscow trying to win help from Russia, whose citizens have billions of euros at stake in Cypriot banks.

Rebuffed by the Kremlin, Sarris said the levy was back "on the table".

On Friday, lawmakers voted in late-night session to nationalise pension funds and split failing lenders into good and bad banks - a measure likely to be applied to the second-biggest lender, the largely state-owned Cyprus Popular Bank CPBC.CY, also known as Laiki.

Cypriot media reports suggested talks were stuck on a demand by the IMF that Bank of Cyprus absorb the good assets of Popular Bank and take on its nine billion euros debt to the central bank as well. The reports said the Cypriot government was resisting.

A Cypriot plan to tap pension funds had already been shelved, a senior Cypriot official told Reuters, under opposition from Germany, which had warned the measure might be even more painful for ordinary Cypriots than a deposit levy.

It was also far from certain that a majority of lawmakers would back a revised levy, or whether the government might even try to bypass the assembly.

Ordinary Cypriots have been outraged by the levy and stunned at the pace of the unfolding drama. They elected Anastasiades in February on a mandate to secure a bailout and save banks whose capital was wiped out by investments in Greece, the epicentre of the euro zone debt crisis.

RUN ON BANKS

For the past week they have been besieging cash machines ever since bank doors were closed on the orders of the government to avert a massive capital flight. Anticipating a run on banks when they reopen on Tuesday, parliament has given the government powers to impose capital controls.

On Saturday, 1,500 protesters, many of them bank workers, marched on the presidency, holding banners that read, "No to the bankruptcy of Cyprus" and "Hands off workers' welfare funds".

The levy on bank deposits represents an unprecedented step in Europe's handling of a debt crisis that has spread from Greece, to Ireland, Portugal, Spain and Italy.

Cypriot leaders had initially tried to spread the pain between big holdings and smaller depositors, fearing the damage it would inflict on the country as an offshore financial haven for wealthy foreigners, many of them Russians and Britons.

The tottering banks hold 68 billion euros in deposits, including 38 billion in accounts of more than 100,000 euros - enormous sums for an island of 1.1 million people which could never sustain such a big financial system on its own. (Additional reporting by Jan Strupczewski and Luke Baker in Brussels, Costas Pitas and Laura Noonan in Nicosia, writing by Giles Elgood, editing by Mike Peacock)

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