Cyprus banks face meltdown as ECB ready to pull plug

AFP, Thursday 21 Mar 2013

Cyprus banks could face further difficulties if ECB decides to halt emergency funding

The European Central Bank warned Thursday it was ready to pull the plug on emergency funding for Cyprus banks as the island's politicians scrambled to raise billions of euros to head off financial meltdown.

The ECB said Cyprus had until Monday to clinch a bailout deal or funds would be cut off, while an EU source said the island had "until Tuesday" to get a workable plan through parliament or risk having to leave the eurozone.

With banks shut since Saturday and not due to reopen until Tuesday, rumours spread Thursday that Popular Bank, the island's second largest, may never open its doors again, sparking panic among customers who formed long queues outside ATM machines to withdraw their daily limits.

Anxious to head off the panic, the island's political leaders raced to put together a "Plan B" to try to raise 5.8 billion euros needed to secure a 10-billion-euro ($13-billion) EU-led rescue package that would prevent the banks from collapsing.

A crisis meeting chaired by President Nicos Anastasiades ended in an announcement that political leaders had agreed to set up a "solidarity investment fund," which media said would nationalise provident funds, with bonds issued against future natural gas revenues.

Legislation giving effect to the deal was being drafted and would be put to the cabinet at 1600 GMT, the government said, while Averof Neophytou, acting leader of the ruling Disy party, said it could be put to parliament for a vote later in the day.

Leaders emerging from the meeting told reporters that a tax on bank deposits that sank an earlier deal had been ruled out completely.

The troika of lenders -- the European Union, European Central Bank and International Monetary Fund -- agreed to the 10-billion-euro bailout on Saturday on condition Cyprus raised the other 5.8 billion euros.

Lawmakers on Tuesday 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 the loan, leaving the government scrambling to find other ways to raise cash to repay its debts.

Eurogroup head Jeroen Dijsselbloem warned in Brussels the crisis poses a "systemic risk" that threatens to ricochet through the eurozone, while ratings agency Fitch said any support package for Cyprus that includes a stability levy "inevitably increases the danger of contagion risks within the eurozone."

And in Moscow, Prime Minister Dmitry Medvedev slammed the European proposals to solve the Cyprus crisis as "absolutely absurd," further raising tension between Russia and the European Union.

The revised plan was hastily drawn up after Finance Minister Michalis Sarris failed to make any progress in Moscow talks to secure aid, as a tough-bargaining Russia sought lucrative assets in exchange for more help.

Sarris was to hold further meetings on Thursday although the prevailing mood offered little optimism.

At the opening of a conference in Moscow with the head of the European Commission, Jose Manuel Barroso, Medvedev slammed the European strategy to bail out the near-bankrupt eurozone member.

"This scheme that is being discussed on Cyprus now looks absolutely absurd," Medvedev said.

"I think that in any case the Eurogroup could examine a future plan of regulating Cyprus with the participation of all the interested sides, including Russian structures."

Russians including wealthy tycoons hold between a third and half of all Cypriot deposits and are believed to have more than $30 billion in private and corporate cash in the island's banks.

Eurogroup head Dijsselbloem said in Brussels a fresh loan from Russia would be the wrong approach to take, as this would only pile up debt to an unsustainable level.

The Cypriot banking model needs a total overhaul, he said.

Referring to "worries about the stability of the eurozone," Dijsselbloem said the "present situation (was) definitely a systemic risk -- the unrest of the last couple of days has proven this."

Also in Brussels, the European Commission on Thursday evoked the risk of a Cyprus default.

"The Commission is convinced that a managed and orderly way forward is still possible in Cyprus," said a spokesman for the EU executive -- which along with the International Monetary Fund is trying to broker the bailout with Nicosia.

The unprompted remark raised eyebrows as it also appeared to raise the spectre of a chaotic, disorderly breakdown.

Shortly afterwards, an EU source speaking on condition of anonymity said that Nicosia has "until Tuesday" to get a workable plan through parliament -- otherwise Cyprus could find itself kicked out of the eurozone.

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