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As Deadline Nears, Cyprus Scrambles to Devise a Bailout As Deadline Nears, Cyprus Scrambles to Devise a Bailout
(about 1 hour later)
BRUSSELS — Eight days after hashing out a bank bailout deal that the financial world reviled and the Cypriot Parliament unanimously rejected, euro zone finance ministers and Cyprus officials planned to meet here on Sunday night. BRUSSELS — European Union leaders convened emergency meetings here Sunday night hoping to devise a bank bailout package that would enable Cyprus to stay in the euro zone and rebuild its devastated economy.
They face a deadline of Monday, when the European Central Bank has said that it will cut off the financing that is keeping Cyprus’s teetering banks from collapsing. The Cypriot president, Nicos Anastasiades, flew up from Nicosia earlier in the day with a proposal for raising the 5.8 billion euros, or $7.5 billion, that his country is supposed to contribute in order to receive 10 billion euros from the International Monetary Fund and euro zone countries.
The Cypriot president, Nicos Anastasiades, flew to Brussels on Sunday after mapping out a tentative outline of a deal late Saturday with representatives of the troika of negotiators involved in the bailout: the European Central Bank, the European Commission and the International Monetary Fund. After the Cypriot Parliament rejected the original deal, with a one-time tax on all deposits in Cyprus banks, Mr. Anastasiades came back Sunday with revamped terms under which a stiffer tax would be levied, but only on deposits above 100,000 euros, as a way to protect smaller account holders.
His first order of business was a meeting with Mario Draghi, the president of the central bank; Christine Lagarde, the managing director of the I.M.F.; and José Manuel Barroso, the president of the commission. Herman Van Rompuy, the president of the European Council, which represents European Union leaders, presided over that meeting, which dragged into the early evening.  Lenders like the I.M.F. and the European Central Bank, also represented at the Brussels meetings, support a deal in which Cypriots impose a substantial tax on wealthier depositors, many of whom are Russians.
The 17 finance ministers of the countries using the euro, whose taxpayers would ultimately provide the 10 billion euros, or $12.9 billion, that Cyprus is seeking, were forced to delay their meeting.  Cyprus faces a deadline of Monday, when in the absence of a bailout deal the E.C.B. has said it will cut off the financing that is keeping Cyprus’s teetering banks from collapsing.
Mr. Anastasiades had briefed Cypriot political leaders on the outline, which is said to call for imposing a hefty one-time tax on bank deposits above 100,000 euros, or about $130,000. Whether that would pass Parliament, whose approval is needed, remains to be seen. Arriving at the meeting, Wolfgang Schäuble, the German finance minister, was blunt in his assessment of what the Cypriots would need to do to reach a deal after the previous deal, hammered out eight days earlier, fell through. 
“The situation is very difficult,” the president said in a statement early Sunday. Later in the day, the nation’s two biggest banks added to the public’s anxiety by limiting bank machine withdrawals to 120 euros. “The numbers have not changed. If anything, they have worsened,” said Mr. Schäuble, who was apparently referring to plummeting confidence in the Cypriot banking system as the bailout talks have dragged on and as banks in Cyprus have remained closed for more than a week.“I hope we will achieve a result today,” Mr. Schäuble said. “But that, of course, depends on the people in Cyprus having a somewhat realistic view of the situation.”
The finance ministers drove a hard bargain last weekend, demanding that Cyprus come up with 5.8 billion euros of its own money — about $7.5 billion — in order to receive the bailout. Pierre Moscovici, the French finance minister, took a more conciliatory tone, emphasizing the need for a “fair” deal for Cyprus and the need for lenders to make a “shared effort” to help Cyprus.
The source of that 5.8 billion euros is the sticking point. As announced a week ago, the money would have been raised by levying a one-time tax on all depositors with money in Cypriot banks — a large portion of which is held by wealthy foreigners, many of them Russians. “The outlines of a solution exist, but the devil is often in the details,” Mr. Moscovici told reporters before the meeting of the finance ministers from the 17 countries in the euro zone. 
But that plan was heavily criticized because it would have hit even small depositors and seemed to violate the trust implicit in the deposit-guarantee system used throughout the euro zone, in which accounts of less than 100,000 euros ($123,000) are supposed to be insured by the government. Earlier Sunday, Mr. Anastasiades met with the top officials of the so-called troika of organizations that would supervise a bailout: Mario Draghi, the president of the E.C.B.; Christine Lagarde, the managing director of the I.M.F.; and José Manuel Barroso, the president of the European Commission. Jeroen Dijsselbloem, president of the group of finance ministers, also participated. 
The fear of an immediate run on Cypriot banks has kept them closed, although they are scheduled to reopen on Tuesday. Customers have stood in long snaking lines throughout the week to get access. Because their meeting ran longer than planned, the session of finance ministers was delayed well past its scheduled starting time of 6 p.m. local time.
Still unclear was whether the banks would reopen if the European Central Bank carries out its threat to cut off short-term financing unless a bailout deal is reached. Before leaving Nicosia, Mr. Anastasiades briefed Cypriot political leaders on the outlines of his proposal, which was said to call for imposing a one-time tax of 20 percent on amounts above 100,000 euros in deposits at the Bank of Cyprus.
The revised terms under discussion would assess a one-time tax  of 20 percent on deposits above 100,000 euros at the Bank of Cyprus, which has the largest number of savings accounts on the island. Because the Bank of Cyprus suffered huge losses on bets that it took on Greek bonds, the government appears to be taking  depositors’ money to help plug the hole. Because the Bank of Cyprus, which has the largest number of savings accounts on the island, suffered huge losses on bets it took on Greek bonds, the government appears inclined to make that bank’s wealthy depositors bear the biggest burden.
A separate tax of 4 percent would be assessed on uninsured deposits at all other banks, including the 26 foreign banks that operate in Cyprus. The 20 percent tax would also hit those with large accounts at Laiki Bank. Parliament voted Friday to fold its accounts into the Bank of Cyprus, effectively closing down Laiki. A demand by international lenders to make the Bank of Cyprus absorb some of the liabilities associated with Laiki was one sticking point in the talks Sunday night.
Under the plan, savings under 100,000 euros would not be touched — a significant difference from the original plan, which not only enraged Cypriot citizens but ignited fear that precedent had been set for  euro zone governments to tap insured bank savings in times of a national emergency. A smaller tax, of 4 percent, would be assessed on deposits exceeding 100,000 euros at all other banks, including the 26 foreign banks that operate in Cyprus.
Cypriot officials have also backed off a proposal that would have sought to raise billions of additional euros by nationalizing state-owned pension funds. Germany, whose political and financial clout dominates euro zone policy, had indicated it opposes the move. Whether any deal reached in Brussels would be approved by the Cypriot Parliament, whose signoff is needed, remained uncertain.
The late negotiations are the culmination of months of wrangling over how to address the financial troubles of the tiny island nation, which has a population of about 1 million. Last June, Cyprus’s banks, flush with deposits from wealthy foreigners seeking high interest rates, took steep losses on their large holdings of Greek bonds when that nation was given its own bailout and bondholders were forced to take losses. Coupled with a decline in real estate values, the banking troubles forced Cypriot leaders to formally ask for a bailout last summer. The late negotiations are the culmination of months of wrangling over how to address the financial troubles of the tiny island nation, which has a population of about 1 million.
The late negotiations are the culmination of months of wrangling over how to address Cyprus’s financial troubles. Last June, Cyprus’s banks, flush with deposits from wealthy foreigners seeking high interest rates, took steep losses on their large holdings of Greek bonds when that nation was given its own bailout. Coupled with a decline in real estate values, Cyprus’s banking troubles forced Cypriot leaders to formally ask for a bailout last summer. Cyprus’s banks took steep losses on their large holdings of Greek bonds last June when that nation was given its own bailout and bondholders were forced to take losses. Coupled with a decline in real estate values, the banking troubles forced Cypriot leaders to formally ask for a bailout last summer.
President Anastasiades, a lawyer by profession and a center-right politician on the same side of European Union politics as Chancellor Angela Merkel of Germany, was voted into office in February on the promise of reaching an effective bailout. The previously agreed bailout deal unraveled in spectacular fashion after it was greeted with revulsion not only by Cypriot lawmakers but by depositors in financially shaky countries like Italy and Spain, fearing similar measures might be imposed on them in the future.
According to those involved in the first round of negotiations a week ago, Mr. Anastasiades pushed for the largest accounts to be subject to a tax of less than 10 percent — a formula that meant the tax would have to hit all depositors in order to raise enough money.  The thinking was that he did not want to be seen as targeting the wealthy foreigners who have long considered Cyprus a bank-friendly tax haven. That many of those foreigners were Russian was not lost on political observers. Under the original agreement, the money would have been raised by a one-time tax on all depositors with money in Cypriot banks, including savers with less than 100,000 euros in their accounts. But that plan seemed to violate the trust implicit in the deposit guarantee system used throughout the euro zone, in which accounts of less than 100,000 euros are supposed to be government-insured.
In the last week, Cyprus sought to work out some sort of side financial-support deal with Moscow, but those talks went nowhere. Russia was said to be trying to make any new support contingent on access to Cyprus’s potentially rich offshore natural gas deposits. Cypriot banks have since remained closed for fear of a run on deposits, although they are scheduled to reopen Tuesday. The only money available to depositors has been what they can take from automatic teller machines before reaching their daily withdrawal limits. Those limits were greatly reduced Sunday at the two large banks: to 100 euros for Laiki Bank and 120 euros for the Bank of Cyprus. Other banks on Cyprus were not affected by the limits.
The natural gas discussions provoked another geopolitically fragile aspect of the Cyprus crisis: the fact that the northern part of the island has been controlled by Turkey since a Greek-backed coup in Cyprus in 1974. On Sunday, Turkey’s ministry of foreign affairs issued a statement warning Cyprus not to use the natural gas as collateral. Doing so, it said, would ignore “the inherent rights of the Turkish Cypriots who are co-owners of the Island.” Mr. Moscovici, the French finance minister, said the terms of new plan did not pose a threat to European financial stability.
With Turkey bristling and Russia seemingly not a fallback option — and with the Cypriot Parliament intent on protecting small bank account holders — Mr. Anastasiades’ best hope now might be the revamped proposal, and the newly sharpened pencil, that he took to Brussels. “We always pleaded for a zero tax for those who are under 100,000 euros,” Mr. Moscovici said. “I am not worried at all about the risk of contagion because the economy of Cyprus, the banking sector of Cyprus, always is very specific.” 
  Cypriot officials also backed off from a proposal that would have sought to raise billions of additional euros by nationalizing state-owned pension funds. Germany, whose political and financial clout dominates euro zone policy, had indicated that it opposed the move.
  Mr. Anastasiades, a lawyer by profession and a center-right politician of the same side of E.U. politics as the German chancellor, Angela Merkel, was voted into office in February on the promise of reaching an effective bailout agreement with his euro zone peers.

James Kanter reported from Brussels and Liz Alderman from Nicosia, Cyprus. Andreas Riris contributed reporting from Nicosia.

According to those involved in the first round of negotiations a week ago, Mr. Anastasiades was the one who pushed for the largest accounts to be subject to a tax of less than 10 percent — a formula that meant the tax would have to hit all depositors in order to raise enough money.
The thinking was that he did not want to seem to be making a target of the wealthy foreigners who have long considered Cyprus a bank-friendly tax haven. That many of those foreign depositors are Russian was not lost on those involved.
In the ensuing week, Cyprus sought to work out a side deal with Moscow, but those talks went nowhere. Russia was said to be trying to make any new support contingent on access to Cyprus’s potentially rich offshore natural gas deposits.
The natural gas discussions provoked another geopolitically fraught aspect of the Cyprus crisis: the fact that the northern part of the island has been controlled by Turkey ever since an Athens- backed coup in Cyprus in 1974. On Sunday, the Turkish Ministry of Foreign Affairs issued a statement warning Cyprus not to use the natural gas as collateral. Doing so, it said, would ignore “the inherent rights of the Turkish Cypriots who are co-owners of the island.”
And so with Turkey bristling and Russia seemingly not a fallback option, and with the Cypriot and European parliaments intent on protecting small-account holders, Mr. Anastasiades headed to Brussels, sharpened pencil in hand.

James Kanter reported from Brussels and Liz Alderman from Nicosia, Cyprus.