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Cyprus’s President Nicos Anastasiades and his team seemed not to comprehend the magnitude of the collapse they were facing, sources close to the negotiations say. (POOL/REUTERS)
Cyprus’s President Nicos Anastasiades and his team seemed not to comprehend the magnitude of the collapse they were facing, sources close to the negotiations say. (POOL/REUTERS)

How money fled Cyprus as president fumbled bailout Add to ...

An EU source said the IMF and Germany had initially wanted to go further and wind down both Laiki and Bank of Cyprus.

European politicians, anxious to deflect criticism for having been party to an initial deal 10 days ago that would have imposed a levy on all small savers in Cyprus, rushed to say that Nicosia had only itself to blame.

“To all those who say that we are strangling an entire people … Cyprus is a casino economy that was on the brink of bankruptcy,” French Finance Minister Pierre Moscovici said.

He said he had always opposed taxing deposits smaller than €100,000, which are subject to an EU guarantee. Yet neither he nor other ministers or European Commission officials spoke out against the idea at the March 15 meeting, participants said.

Only when a firestorm of protest erupted in Cyprus and it became clear the Cypriot parliament would not endorse the plan did they belated call for accounts under the €100,000 threshold to be left untouched.

Perhaps the most disastrous episode in a week of blunders and miscalculation was the Cypriot attempt to persuade Russia to provide alternative finance in return for future access to the island’s untapped offshore gas reserves.

Cypriot lawmakers overplayed their hand in rejecting the deposit levy in the misguided belief that Moscow would come to the island’s aid. Cypriot Finance Minister Michael Sarris was dispatched to Moscow without any clear game plan or mandate the day after the 56-member legislature voted 36-0 to reject the levy, a source close to his delegation said.

After a frosty initial meeting on Wednesday, at which his Russian counterpart offered nothing in response to his request for a new €5-billion loan and easier repayment terms on an existing €2.5-billion credit, Mr. Sarris was left to stew in his suite at the Lotte Plaza hotel on Moscow’s Garden Ring.

Russian gas monopoly OAO Gazprom denied reports that it was considering lending Cyprus money in return for future access to its gas, and VTB Bank, Russia’s No. 2 bank, disavowed any interest in buying Laiki.

The Russians kept Mr. Sarris waiting all day Thursday. Talks only resumed at 9 p.m. and went nowhere. By midnight, he knew he would be returning to Nicosia the next morning empty-handed, although his hotel suite was booked until Monday.

The European Commission and the ECB had quietly told the Russian Finance Ministry and central bank that any further loan from Moscow would just add to Cypriot debt and hence undermine the basis for an EU-IMF bailout, sources with knowledge of the exchange said.

Russian Prime Minister Dmitry Medvedev accused the EU of handling the Cyprus crisis “like a bull in a china shop.” He and President Vladimir Putin complained to visiting European Commission President Mr. Barroso that Moscow should have been consulted before the decision to impose a levy on depositors.

Mr. Barroso responded that Europe and Russia each had their own procedures and he was not there to negotiate with Russia about Cyprus, an EU source familiar with the talks said. Despite Kremlin anger, Moscow decided it would not let itself be played off against Brussels.

The most powerful force pushing Cyprus to accept a deal was the European Central Bank, which for months had kept the country afloat despite growing internal misgivings about the banks’ solvency.

Hours before the ECB announced that it would turn off the ELA taps for Cypriot banks on Monday, a Cypriot lawmaker said: “[Mr.] Anastasiades is just trying to scare parliament. The ECB would never do that, it needs a two-thirds majority.”

ECB officials contacted Latvia, another EU country that has received large Russian deposits, to warn authorities against taking in Russian money fleeing Cyprus, two sources familiar with the contacts said.

“It was made clear to our Latvian friends that if they want to join the euro, they should not provide a haven for Russian money exiting Cyprus,” a euro zone central banker said.

Even after a week of drama in Nicosia and disillusionment in Moscow, Mr. Anastasiades and his team seemed not to comprehend when they arrived in Brussels on Sunday the magnitude of the collapse they were facing.

“It took more time for the Cypriots and the Cypriot authorities to fully understand what their options were and how deep the crisis was,” Jeroen Dijsselbloem, the Dutch chairman of euro zone finance ministers, told Reuters in an interview.

“It’s hard for me to say what made the penny drop, I think it was probably because it was five to midnight, literally it was five to midnight, and we were not making much progress and we simply said to the Cypriots: ‘Look, we’re ready to help you, there’s 10 billion available, but you have to realize what the present situation is. You have to act now. Political choices have run out.’ There was a deadline. And that worked.”

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