Cyprus in fevered talks with EU

Options few for penniless island nation’s troubled banks

European and Cypriot officials were locked in talks Friday to find a formula to avert the Mediterranean island’s financial collapse, struggling to forge a consensus on a bailout package before the European Central Bank cuts funding.

Cyprus’ options narrowed after Russia spurned a bid for a loan and German lawmakers dismissed the Cypriot government’s latest rescueproposals. That left international creditors to hammer out fresh terms with President Nicos Anastasiades’ coalition focusing on the fate of Cyprus’ ailing banks.

“We believe that in the next few hours we could be able, with a lot of difficulties, to reach a framework that will be within the policies of the EU, European Central Bank and IMF,” Averof Neofytou, deputy president of Cyprus’ ruling Disy party, told reporters in Nicosia, the capital, late Friday, referring to the troikaof creditors.

European patience with Cyprus is running out after the country’s parliament rejected an initial plan, designed last weekend by euro finance ministers, to tax bank deposits. The same finance chiefs are now considering a plan to close Cyprus’ two biggest banks and freeze the assets of uninsured depositors, four European officials said Thursday. Deposit levies could still form part of a final deal, Cypriot officials said.

The European CentralBank has said it will cut off emergency funding to Cypriot banks at the end of Monday, unless there is a deal.

Cyprus needs to come up with $7.5 billion to free up a $12.9 billion bailout from the International Monetary Fund and the eurozone’s rescue mechanism.

The Cypriot central bank proposed a bill late Thursday to overhaul the banking system that would allow Cyprus Popular Bank Pcl, the country’s second-largest lender, toavoid a “catastrophic” bankruptcy and protect insured deposits up to about $129,432.

The government also submitted a draft law to create an “investment solidarity fund” intended to help raise the money needed to trigger loans, staterun CYBC television reported.

Eurozone finance chiefs still insist that Cyprus come up with $7.5 billion and that it undertake “substantial changes” to its financial industry burdened by “four big Cypriot banks that are not viable,” Luxembourg Finance Minister Luc Frieden said Friday on German RBBInfoRadio.

“I see little wiggle room with some European countries, also financially, to make more concessions toward Cyprus,” hesaid. “Time is slipping away,” said Frieden. “Banks will open again in Cyprus on Tuesday, and a solution is absolutely necessary, because this is not just about Cyprus, it also concerns Germany, Luxembourg and the stability of the eurozone. We need a credible plan.”

Cyprus in June became the fifth eurozone nation to request a rescue. The move came after Greece’s debt restructuring, the largest in history, trashed the financial health of lenders, including Bank of Cyprus Plc and Cyprus Popular Bank.

Cyprus Popular, founded in 1901 as a small savings bank, operates in Cyprus, Greece, the U.K., Ukraine, Russia, Romania, Serbia, Malta and China through 439 branches, servicing 1.35 million customers, according to information on its website.

The bank, which employs about 8,500 people, posted a net loss of $2 billion for the first ninemonths of 2012. That came after a net loss of $4.7 billion in 2011 after write-downs on Greek government bond holdings, goodwill related to its Greek business and making provisions for loan losses.

Under one plan pushed by euro finance chiefs, Cyprus Popular Bank Pcl and the Bank of Cyprus Plc would be split to create a so-called bad bank. Insured deposits - below the European Union ceiling of $129,432 - would go into a so-called good bank and not sustain any losses, while uninsured deposits would go into the bad bank and be frozen until assets could be sold, four euro region officials said.

At $22 billion, Cyprus’ financial needs are almost equivalent to the country’s entire economic output, a magnitude of bailout that has never been awarded before, Merkel told reporters on March 20. That means “the bank sector must contribute tothe sustainability of Cypriot debt,” she said.

Cypriot Finance Minister Michael Sarris, who met the same day in Moscow with Russian First Deputy Minister Igor Shuvalov and Finance Minister Anton Siluanov, said Friday that Russia would offer no additional support beyond restructuring a $3.2 billion loan granted in 2011.

Merkel told a private meeting of legislators in Berlin on Friday that Cyprus’ decision to test Europe is unacceptable, and that it must now act quickly, a party official said.

Cyprus is living “in an illusion,” Michael Meister, deputy parliamentary leader of Merkel’s CDU, told BBC Radio 4’s Today program. “They have to restructure the whole economy, restructure the banking sector and until now I don’t see the Cyprus people and politicians agreeing on this.”

Business, Pages 25 on 03/23/2013

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