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With No Deal on Horizon, Cyprus Keeps Banks Closed Cyprus Keeps Banks Closed and Scrambles to Find Funds
(about 1 hour later)
NICOSIA, Cyprus — Scrambling to placate international lenders, Cyprus late Wednesday proposed to nationalize the country’s pension funds and conduct an emergency bond sale to help raise the 5.8 billion euros the indebted country needs to secure a bailout. NICOSIA, Cyprus — Scrambling to placate international lenders, Cyprus late Wednesday proposed to nationalize pension funds from state-run companies and conduct an emergency bond sale to help raise the €5.8 billion the indebted country needs to secure a bailout.
The proposals are meant to slash the amount of money that would be raised a controversial tax on bank deposits, as originally planned in a 10 billion euro international bailout package that the Cypriot Parliament rejected the night before. The proposals are meant to sharply reduce the amount of money that would be raised by a controversial tax on bank deposits, as originally planned in an international bailout package totaling €10 billion, or about $13 billion, that the Cypriot Parliament rejected the night before.
But even the revised plan contains a bank tax, that while much smaller than originally proposed, might still not be palatable to Parliament. Under the new plan, all Cypriot bank deposits of up to 100,000 euros would be hit by a one-time tax of 2 percent. Deposits about that threshold would be subject to a 5 percent levy. But even the revised plan contains a bank tax that, while much smaller than originally proposed, might still not be palatable to Parliament. Under the new plan, all Cypriot bank deposits of up to €100,000 would be hit by a one-time tax of 2 percent. Deposits above that threshold would be subject to a 5 percent levy.
The fallback was being cobbled together as Cyprus’s finance minister pressed his case in Moscow Wednesday in hopes of securing additional aid from Russia.  The fallback was being cobbled together as Cyprus’s finance minister pressed his case in Moscow on Wednesday in hopes of securing additional aid from Russia, many of whose wealthiest citizens have big deposits in Cypriot banks.
The government extended through next Tuesday a bank holiday designed to prevent a run on Cyprus’s financial institutions. Banks have frozen all accounts in a  financial crisis here that risks tipping the country into default and sowing turmoil across the euro zone. At the same time the Cypriot government extended through next Tuesday a bank holiday meant to prevent a run on Cyprus’s financial institutions. Banks have frozen all accounts in a financial crisis here that risks tipping the country into default and sowing turmoil across the euro zone.
Banks have been closed since Saturday, and authorities have ordered banks to keep A.T.M.’s filled with cash as long as their doors remain shut. But that has been of little help to the thousands of international companies with accounts in Cyprus, which cannot transfer money in and out of their accounts to conduct  business. Banks have been closed since Saturday, and the authorities have ordered banks to keep automated bank machines filled with cash as long as their doors remain shut. But that has been of little help to the thousands of international companies who do banking in Cyprus, which cannot transfer money in and out of those accounts to conduct business.
The extended bank holiday is aimed at buying time for Cypriot authorities to reach an agreement with the International Monetary Fund, the European Central Bank and the European Commission, which were not certain to approve Cyprus’s latest plan. The extended bank holiday is designed to buy time for the Cypriot authorities to reach an agreement with the so-called troika of rescuers — the International Monetary Fund, the European Central Bank and the European Commission — whose representatives were in Nicosia on Wednesday but were not certain to sign off on Cyprus’s latest plan.
Three banks dominate the economy, and each is edging close to collapse. The government was also making tentative plans  to merge at least two of them — Cyprus Popular Bank and Bank of Cyprus — and placing the healthy assets into one entity, while moving troubled assets into a so-called bad bank. Three banks dominate the economy, and each is edging close to collapse. The government was also making tentative plans to merge at least two of them — Cyprus Popular Bank and Bank of Cyprus — and place the healthy assets into a one entity, while moving troubled assets into a so-called bad bank.
European officials, and especially the European Central Bank, are watching the situation with alarm, said one person with direct knowledge of the discussions, who was not authorized to speak publicly. With all sides fearing that a crisis is imminent, even the Church of Cyprus, one of this Mediterranean island’s biggest investors, was offering to throw its considerable wealth behind the rescue effort.
If a deal is not reached soon for a bailout that would support the banks, or if Cyprus does not find funds through some other route in the meantime, European officials fear that “the damage would be enormous, and the country itself would be at risk of collapse,” the person said. European officials, and especially the European Central Bank, are watching the situation with alarm, said a person close to the discussions who was not authorized to speak publicly. Right now, Cypriot banks, crippled by their heavy exposure to Greece’s collapsed economy, are heavily dependent on low-interest financing from the E.C.B., which could be cut off if the banks do not remain solvent.
If that happens, the person added, officials are concerned that a clear risk would arise that Cyprus could “go out of the euro,” creating “a painful situation that would spur chaos.” If Cyprus does not soon receive a financial lifeline, European officials fear that “the damage would be enormous, and the country itself would be at risk of collapse,” the person close to the discussions said. Officials are concerned about the risk that Cyprus might need to leave the euro currency union, creating “a painful situation that would spur chaos,” this person said.
The troika of lenders is insisting that Cyprus come up with 5.8 billion euros, or $7.5 billion, of the 10 billion euro bailout negotiated last weekend. The bank deposits tax, which Parliament voted down overwhelmingly Tuesday along with the bailout plan, was part of that bargain. On Wednesday morning, the finance minister of Cyprus, Michalis Sarris, met with his Russian counterpart, Anton G. Siluanov, at the Russian Finance Ministry. In the afternoon Mr. Sarris met for about 90 minutes with a deputy prime minister, Igor I. Shuvalov, at the main government offices in the Russian White House.
The finance minister of Cyprus, Michalis Sarris, met on Wednesday morning with his Russian counterpart, Anton G. Siluanov, at the Russian Finance Ministry, and in the afternoon for about 90 minutes with a deputy prime minister, Igor I. Shuvalov, at the main government offices in the Russian White House. Cypriot banks racked up huge losses in the past several years by issuing loans to businesses in Greece that are now virtually worthless as that country grapples with the fourth year of a severe recession. The banks also took huge financial losses on large holdings of Greek government debt, which they bought when times were good in order to profit from attractive interest rates. The bailout crisis has outraged average Cypriots, many of whom oppose the government’s skimming their accounts to pay for the banks’ mistakes.
Emerging from the morning session, Mr. Sarris reported no progress. “We had a very good first meeting — a very constructive, very honest discussion,” he said. “We underscored how difficult the situation is, and we will now continue our discussions to find a solution by which we hope we will be getting some support from Russia.” Russia has a significant stake in the outcome because its citizens, including many of the country’s wealthiest people, have a total of about $30 billion on deposit in the failing Cypriot banking system. Russia has already given Cyprus a €2.5 billion loan, and talks have been under way for months about additional aid.
He said discussions would continue. “We will stay here until we reach some agreement,” Mr. Sarris said. Emerging from Wednesday morning’s session, Mr. Sarris reported no progress. “We underscored how difficult the situation is,” he said, “and we will now continue our discussions to find a solution by which we hope we will be getting some support from Russia.”
Russian officials would not comment on the afternoon session but said the meetings were done for the day. A news conference planned at the Cypriot Embassy was canceled on Wednesday afternoon.Russian officials would not comment on the afternoon session but said the meetings were done for the day. A news conference planned at the Cypriot Embassy was canceled on Wednesday afternoon.
Russian leaders, including President Vladimir V. Putin, had reacted furiously to the bank deposit tax, which they said caught them by surprise. Russian leaders, including President Vladimir V. Putin, had reacted furiously to the inclusion of a bank deposit tax in the original bailout proposal, which they said caught them by surprise. Because it is not a member of the euro currency union, Russia was not a party to the bailout deal reached early last Saturday in Brussels by euro zone finance ministers.
In a sign that Russian interest in developing off-shore natural gas reserves may be part of the discussions, the Cypriot energy minister, Georgios Lakkotrypis, was also in Moscow on Wednesday. Prime Minister Dmitri A. Medvedev of Russia warned Wednesday that the European proposal of a tax on bank deposits could itself precipitate “a new series of local financial crises.”
Mr. Shuvalov, in public comments on Tuesday, had expressed reluctance to extend any additional aid to Cyprus given the lack of consultation. But some flexibility seemed inevitable given that Russian citizens have about $30 billion on deposit in the failing Cypriot banking system. Russia has already given Cyprus a 2.5 billion euro loan, and talks have been under way for months about additional aid. Mr. Medvedev, speaking to Russian and European journalists at his Gorky residence outside of Moscow, seemed to struggle for words in describing his reaction to the proposed tax on deposits. “I cannot compare it to anything but some decisions made at a certain period of time by the Soviet authorities that did not care much about people’s savings,” he said, according to Russian news agencies.
In his comments outside the Russian Finance Ministry, Mr. Sarris denied that there had been a specific offer of help from Gazprom, the giant Russian natural gas producer. “There were no offers — nothing concrete,” he said. He added: “We are continuing discussions. We are happy with a good beginning.” Mr. Medvedev said the ultimate resolution of the situation in Cyprus could affect relations between Russia and the European Union, which have been in competition to some degree over who will hold more sway over Cyprus’s financial future.
In Nicosia, a Cypriot government spokesman said President Nicos Anastasiades’s cabinet had forged a new proposal that aimed to “reduce the 5.8 billion euro haircut from depositors, by borrowing from our own resources.” He did not provide details, but state television reported that consideration was being given to tapping Cyprus’s national pension fund or issuing new debt. Russia is said to be proposing its own Cypriot bailout deal, on the condition that Nicosia agrees to grant Russia’s energy industry rights to Cyprus’s potentially rich offshore reserves of natural gas. Although Moscow has not acknowledged such a proposal, in a further sign that gas rights might be part of the discussions, the Cypriot energy minister, Georgios Lakkotrypis, was also in Moscow on Wednesday.
And in a surprise twist, the head of the Church of Cyprus, Archbishop Chrysostomos II, went on television to propose putting all of its properties up as collateral so that the state could issue a new round of sovereign bonds to raise money. The church is one of the largest and most influential investors on this Mediterranean island, with extensive holdings in banks, real estate and other interests. In his comments outside the Russian Finance Ministry, Mr. Sarris denied that there had been a specific proposal of help from Gazprom, the giant Russian natural gas producer. “There were no offers — nothing concrete,” he said.
In Nicosia, the troika of lenders is still insisting that Cyprus somehow come up with €5.8 billion of the €10 billion bailout negotiated last weekend. The bank deposits tax, which Parliament voted down overwhelmingly Tuesday along with the bailout plan, was supposed to be the source of the country’s contribution to the bailout package.
The original deal called for a tax of 6.75 percent on deposits of less than €100,000 and 9.9 percent on deposits above that threshold. Even after the Cypriot president, Nicos Anastasiades, revised the terms to exempt depositors with less than €20,000 in their accounts, Parliament rejected the plan.
The proposal that Mr. Anastasiades’s cabinet announced early Wednesday evening calls for coming up with a portion of the €5.8 billion in part by taking over the pension funds of state-run companies, while also issuing additional government bonds. It was unclear late Wednesday how politically viable the pension seizure might be, or how the idea of taking on more debt might fly with the troika representatives.
In a separate and surprising twist on Wednesday, the head of the Church of Cyprus, Archbishop Chrysostomos II, went on television to propose putting all of its properties up as collateral so that the state could issue a new round of government bonds to raise money. The church is one of the largest and most influential investors in Cyprus, with extensive holdings in banks, real estate and other interests.
The archbishop suggested that all of the Church’s dioceses, parishes and monasteries — which are also big investors — could then buy a portion of the bonds to help the country at a time of need.The archbishop suggested that all of the Church’s dioceses, parishes and monasteries — which are also big investors — could then buy a portion of the bonds to help the country at a time of need.
Describing the church’s holdings as “huge,” the archbishop said it would “put all its property is in the country’s disposal in order to support the people, avoid the banking collapse and help the country stand on its own feet.” Describing the church’s holdings as “huge,” without specifying a number, the archbishop said it would “put all its property is in the country’s disposal in order to support the people, avoid the banking collapse and help the country stand on its own feet.”
He said Parliament had made the right decision in rejecting the bailout terms “and sent a clear message to Europeans that they should learn to respect smaller countries.” He said Parliament had made the right decision in rejecting the original bailout terms “and sent a clear message to Europeans that they should learn to respect smaller countries.”
The church is the biggest stakeholder in Hellenic Bank, Cyprus’s third-biggest bank, and one of the biggest shareholders in the Bank of Cyprus, the largest bank. It owns hotels, vast swaths of land and a lucrative beverage company, Keo, that produces wines, beers and bottled water and is the biggest importer of Heineken beer. The church is the biggest stakeholder in Hellenic Bank, Cyprus’s third-biggest bank, and one of the biggest shareholders in the largest, the Bank of Cyprus. It owns hotels, extensive swaths of land and a lucrative beverage company, Keo, that produces wines, beers and bottled water and is the biggest importer of Heineken beer.
It was unclear whether the troika would find such a proposal to be part of a viable solution for Cyprus. The moves, however, are a clear sign that Cyprus is trying to figure out ways to reduce its dependence on international lenders and avoid the harsh terms that would be attached to a bailout from them. It was unclear whether the troika would find such a proposal to be part of a viable solution for Cyprus. The moves, however, are a clear sign that Cypriot institutions are trying to figure out ways to reduce the country’s dependence on international lenders and avoid the harsh terms that would be attached to a bailout from them.
Fears of a bank run if Cyprus cannot negotiate a bailout deal had already led the government to extend a bank holiday that was to have expired Tuesday. The latest extension dovetails with a three-day religious holiday through next Monday. That would keep banks closed until next Tuesday to give officials more time to work out a deal.
“Until a solution is found, we need to protect the banks,” Cyprus’s deputy bank governor, Spyros Stavrinakis, said Wednesday.
The banks racked up huge losses in the past several years by issuing loans to businesses in neighboring Greece that are now virtually worthless as that country grapples with the fourth year of a severe recession.
The Cypriot banks also took huge financial losses on large holdings of Greek debt, which they bought when times were good in order to profit from an attractive interest rate.
The bailout Cyprus is seeking has outraged average Cypriots, many of whom see the terms of the original proposal as little more than the government skimming their bank accounts to pay for the banks’ mistakes.
David M. Herszenhorn reported from Moscow. Andreas Riris contributed reporting from Nicosia.David M. Herszenhorn reported from Moscow. Andreas Riris contributed reporting from Nicosia.