Facing an imminent banking meltdown, the desperate Cypriot government appealed to an odd cast of characters, including Russia and the Christian Orthodox Church, for financial help the day after its bailout package collapsed.
The pleas came as the government ordered its banks shuttered until at least Tuesday, for fear that reopening them without a rescue package in place would trigger a fatal bank run.
“Foreigners will withdraw funds from the bank even if a bailout comes,” said Michael Papapetrou, a lawyer who represents foreign clients, many of them Russians whose total bank deposits in Cyprus are estimated at €25-billion. “It will take some time to rebuild confidence [in the banking system].”
Cyprus is a tiny country but the implosion of its banking sector would wreak outsized financial damage across Europe. Stuffed with foreign cash, its banks were allowed to get too big, and hence, too risky, for their own good. Their deposit base represents 700 per cent of the country’s gross domestic product.
Cypriot Finance Minister Michael Sarris was in Moscow on Wednesday to meet his Russian counterpart, Anton Siluanov, and Deputy Prime Minister Igor Shuvalov to try to negotiate a financial package that would end the Mediterranean island’s financial crisis, or at least buy it some time.
While details of the talks were not revealed, the Cypriot press was full of speculation that the Russians would play a clever geopolitical game that might see them emerge with rights to Cyprus’s natural-gas discoveries or even a base for its Mediterranean warship fleet.
But Mr. Sarris came up short – “no offers, nothing concrete,” he said – and vowed not to leave Moscow until he had some sort of deal. “We had a very good first meeting, very constructive, very honest discussion,” he said after his meeting with Mr. Siluanov.
Mr. Sarris has two crucial goals: To negotiate enough Russian loans to keep the Cypriot banks afloat and to prevent Russians from snapping up their cash from Cypriot banks, a scenario that still might not be able to protect banks from widespread collapse.
Both Russian President Vladimir Putin and Prime Minister Dmitry Medvedev condemned the proposed bailout plan even though it had been endorsed by the euro zone’s finance ministers; Mr. Medvedev compared it to Soviet-era confiscation raids because the plan’s centrepiece was a tax on bank depositors that ranged from 6.75 per cent for deposits under €100,000 and 9.9 per cent for those over that amount.
The tax would have put €5.8-billion toward the bailout. In exchange, the euro zone was prepared to offer a €10-billion loan, taking the total bailout up to about €16-billion.
The proposal, unprecedented among the five European bailouts, triggered outrage among Cypriots. The Cypriot parliament overwhelmingly rejected the tax on Monday night, effectively killing the bailout plan and sending the banks one big step closer to implosion.
Mr. Sarris wants Russia to enlarge the €2.5-billion loan it extended to Cyprus two years ago. During that crisis, Cyprus was reeling from the contagion of the Greek banking crisis and deep recession.
In an effort to keep Russian deposits in Cyprus intact, the country is now to guarantee that the amounts lost to the tax, if it is imposed, would be reimbursed by future state revenues from Cyprus’s as-yet-undeveloped gas fields.
Aware that it cannot keep its banks closed beyond Tuesday, for fear of crippling Cypriot businesses, the government even approached Greece for bailout loans for its banks, but was turned down by the Bank of Greece. It had more luck with the wealthy Orthodox Church, which offered to mortgage its vast real-estate portfolio in exchange for state bonds. The offer has not been officially accepted as yet.
Credit cards rule as Cypriots run short of cash
Cypriots are conserving their cash because the banks have been closed since Monday and will remain closed until at least Tuesday while the government tries to hammer out a bailout plan to keep the from financial collapse. While some ATMs are operating, the fear is that they will stop being replenished if the crisis is not resolved soon.
“All the people who are shopping here are paying with cards because they have no cash,” said Greta Andreou, owner of a Nicosia store about a kilometre from the city centre called Lo Shu Feng Shui, which sells semi-precious stones such as amethysts. “But not a lot of people are coming this week.”
She said the bank closure is on the verge of damaging her business, because, with the banks closed, she cannot arrange payments to overseas suppliers.
In the centre of Nicosia, the story was similar: credit cards ruled, and shop owners and employees were getting angry about the stalled, and faulty, bailout.
Livio Mateicuc, the Romanian-born supervisor of the Bamboo restaurant, said the proposed tax on bank depositors was unfair and possibly counterproductive. “The rich should pay more of the tax,” he said, “but not so much more or they will cut salaries or leave the country.”