Cyprus on brink

 
Tim Wallace
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EUROZONE finance ministers spent the early hours of this morning locked in high-stakes talks to agree the final details of a bailout deal that could save Cyprus and its banks from bankruptcy.

Reports last night suggested that EU Council president Herman Van Rompuy had brokered a last-minute deal between the Cypriot President and the troika as today’s deadline approached, with the Eurozone’s finance ministers reconvening after midnight to debate the plan.

The draft proposal, which still has to be approved by the finance ministers, would save the Mediterranean island from meltdown by winding down Popular Bank of Cyprus, also known as Laiki, and shifting deposits below €100,000 to the Bank of Cyprus to create a “good bank”.

Deposits above €100,000, which under EU law are not guaranteed, would be frozen and used to resolve debts, and Laiki would effectively be shuttered.

An EU spokesman said no levy would be imposed on any deposits in Cypriot banks.

News of the breakthrough sent the euro up by around half a cent to $1.3033 against the US dollar, despite key parts of the deal remaining unresolved – including the matter of almost €10bn in emergency liquidity assistance that Cypriot banks have already received from the ECB.

The eleventh-hour talks came after a dramatic day in Cyprus, which saw President Nicos Anastasiades threaten to resign just weeks after taking office, and a small homemade bomb go off at a bank in the town of Limassol.

The island’s banks also cut the amount depositors could remove from ATMs to just €100 (£85) per day in an unprecedented move to try to stop a run on the country’s banks.

The European Central Bank had set today as deadline day, telling Nicosia it would cut off liquidity support to the bust lenders if no deal had been done.

Cutting off the emergency support could lead to the banks and state failing, potentially ending in the Eurozone’s first exit.

Even plans to keep the country in the single currency area could undermine some of its key tenets – capital controls could slow down or stop a run on the banks and the country, but break key rules on the free movement of capital.

Anastasiades’s crunch talks with the International Monetary Fund and European Central Bank last night centred on how the island state can raise enough funds to recapitalise its broken banks, without taking any more from the rest of the Eurozone.

Cyprus has been struggling for days to work out how to raise the €5.8bn needed for the state to get approval for a €10bn loan from the Eurozone and the International Monetary Fund (IMF).

The international bodies have so far refused to offer the troubled nation any more partly because they insist it must have debts of no more than 100 per cent GDP by 2020.

But they are also reluctant to fully bail out a profligate government, preferring to be tough to discourage others – for instance Greek government creditors last year took a hit under the terms of the bailout, while tough conditions were applied to the government’s future spending under the agreement.

Cyprus is also likely to see controls put on its legislation and spending, likely beginning with new rules on money laundering as the country’s authorities are often seen as something of a soft touch.

Today is also a scheduled bank holiday, allowing more time for the deal to be completed.

But even if negotiations agree any solution, capital controls are likely to be imposed in a bid to stop runs on the banks materialising after more than a week of forced closures which stopped customers accessing the vast majority of their cash.