Leaders search for best way to raise €5.8bn

 
Tim Wallace
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EUROZONE and Cypriot leaders were last night scrabbling to find the least damaging way to resolve the crisis.

The most likely option appears to involve resolving the Cyprus Popular Bank and potentially also the Bank of Cyprus, winding down the banks.

As depositors with more than €100,000 (£85,278) are not guaranteed they would take a hit of up to 25 per cent.

Uninsured depositors in other banks would lose four per cent while uninsured depositors would be untouched. The plan is a modification of the proposal MPs rejected last week, but may be unpopular as depositors had assumed their cash was safe.

Capital controls are also likely to be applied, stopping Cypriots or foreigners with money in the country taking much abroad.

The controls are intended to stop a bank run. But they would be very hard to remove in future and would end the free movement of capital that is central to EU membership.

Other alternatives are available – another loan from Russia could help depositors but would undermine relations with the EU.

It is possible the Eurozone could increase its aid from the €10bn currently offered, though Germany is reluctant to offer more and cautious about increasing Cypriot debt to above 100 per cent of GDP.

€5.8bn

FULL-SCALE DEPOSIT RAID
The initial proposal was for the €5.8bn to be raised by taxing all bank deposits in Cyprus. That was very unpopular, in part because it had been ruled out by President Nicos Anastasiades (pictured) and partly because those with less than €100,000 (£85,278) had thought themselves insurered against any collapse. The measure was voted down in parliament with not a single MP backing the plan. It is unlikely to be tried again, though a variation focusing on those above the insured threshold could well end up being used to raise the necessary funds.

BANK RESTRUCTURING
The biggest banks are in trouble and one proposal is to break them into good and bad banks. As they are deemed to have failed and they are in need of the biggest help, it is likely that their depositors will be hit the hardest. Uninsured account holders – those with above €100,000 – are set to face hits of 20 or even 25 per cent to raise the €5.8bn needed. In return they could get shares in the new good bank, essentially being bailed in. Under this proposal the other lenders – dozens of small credit unions and a range of foreign banks – would see big depositors pay around four per cent, well below the 10 to 15 per cent previously threatened.

EUROZONE FUNDS
The Eurozone had agreed to lend Cyprus €10bn as part of the bailout package. The island state could try asking for the extra €5.8bn from the other euro countries to make up the difference and avoid hitting depositors. But other nations, led by Angela Merkel (pictured) are keen not to give too much help to profligate states – particularly in a German election year.

CAPITAL CONTROLS
Confidence in Cyprus and its financial institutions has been shaken badly. Banks have been closed for more than a week to prevent a run on the lenders. Once they re-open, politicians fear that run will take place as depositors no longer have faith in the institutions. So capital controls are likely. These are expected to control how much money can be taken out of any one bank on a given day, and how much can be taken out of the country. Controls should help slow any bank run to a trickle. However, critics warn it will also dissuade anyone from brining money into the country as they will struggle to take it out again.

RUSSIAN CASH
Cyprus and Russia have close links, with Cyprus often seen as a route for Russian capital to enter the EU. Russia, now le by President Vladimir Putin (pictured) gave Cyprus a €2.5bn loan back in 2011, and had been involved in negotiations to lend more. However Cyprus faced the possibility of being cut off by the EU if it took foreign funds. The negotiations are believed to have stalled with no deal even to change the terms of the existing loan.

EUROZONE EXIT
If no plan is agreed – or the terms are deemed too tough – the banks will not be recapitalised and the European Central Bank would cut off its liquidity support. If the banks then collapse the government would be unable to repay depositors and may itself go bust with the effort. That could result in the country leaving the Eurozone and defaulting on its debts as it would be using a new currency. It would certainly be painful in the short term – the new currency would have very little value relative to other currencies. However the government may hope that in the longer term that weak currency would make the country;’ goods very cheap as exports and for tourists, eventually stimulating the economy and getting back to growth.