The Cypriot government is scrambling to find bailout "Plan B" as anxieties rise about the timing of the reopening of the banks.
Cypriot banks remained closed again Wednesday and the government's self-imposed deadline to reopen them by Thursday seems unlikely to be met. While some ATMs still have cash, businesses fear they will soon get crippled unless they can resume normal banking activities, such as making payments to foreign suppliers.
The Cypriot government was locked in meetings Wednesday in Nicosia to try to create a new bailout plan that would be acceptable to the Euro group – the finance ministers of the 17 euro zone countries.
Cyprus's finance minister, Michael Sarris, was in Moscow Wednesday to seek financial assistance from the Russian government as Russia emerged as a potential saviour. Cypriot president Nicos Anastasiades used a half-hour phone call with his Russian counterpart, Vladimir Putin, to ramp up the save-Cyprus pressure.
Russia has already come to the rescue once. It loaned Cyprus $3.3-billion (U.S.) in 2011 as the Cypriot economy and banking system began to fall apart. Nicosia was rife with rumours that Russia might be prepared to increase or extend the loan in exchange for natural gas rights – Cyprus has substantial offshore gas discoveries that have yet to be developed – or access to a port for its Mediterranean warships.
Another idea would see Russian investors take control of Popular Bank of Cyprus, the second largest lender, which is close to collapse. It was largely nationalized last year. There was no confirmation Wednesday that Russia was prepared to move on any of these fronts.
Cyprus is trying to find about €5.8-billion ($7.5-billion U.S.) to contribute to the bailout. If it comes up with that amount, the Euro group will approve a €10-billion rescue loan designed to keep the country's fragile banking system afloat.
The €5.8-billion contribution was supposed to come from a tax on bank deposits. But a parliamentary vote to approve the tax failed Tuesday night, sending lawmakers searching for what they called "Plan B." Whether the plan would be revealed Wednesday or later in the week was not known. Raiding the pension funds was said to be one option under consideration.
In an interview, Michael Papapetrou, a lawyer who represents foreign clients, many of them Russians with billions of euros of exposure to the Cypriot banks, said all bank depositors were nervous about bank reopenings. "I still think the situation is manageable, but if the banks reopen [without a bailout plan], they would collapse within an hour," he said. "If the banks do not open by Tuesday, the whole thing will collapse."
But he thinks foreign funds will flow out of Cyprus even if a bailout is approved in the next few days. "I think that foreign funds will move," he said. "It will take some time to rebuild confidence [in the banking system]."
Russians have enormous exposure to Cypriot banks. Moody's, the ratings agency, estimated that Russian bank deposits in Cyprus total almost €25-billion.
"The entire wealth of the Church is at the disposal of the country ... so that we can stand on our own two feet and not on those of foreigners," Archbishop Chrysostomos said after meeting Anastasiades early on Wednesday. The Church of Cyprus is a major shareholder in Cyprus's third-largest domestic lender, Hellenic Bank. Leaders of the currency union said the bailout offer still stood, provided the conditions were met.
The ECB had threatened to end emergency lending assistance for teetering Cypriot banks, crippled by their exposure to the financial crisis in neighbouring Greece.
Euro zone paymaster Germany, facing an election this year and increasingly frustrated with the mounting cost of bailing out its southern partners, said Cyprus had no one to blame but itself.
"For an aid program we need a calculable way for Cyprus to be able to return to the financial markets. For that, Cyprus's debts are too high," said Germany's finance minister, Wolfgang Schaeuble.
With Sarris and Energy Minister George Lakkotrypis in Moscow, there was mounting speculation that Russian oil and gas giant OAO Gazprom had mooted its own assistance plan in exchange for exploration rights to Cyprus's offshore gas deposits.
Noble Energy reported a natural gas recovery of 5 to 8 trillion cubic feet of gas south of Cyprus in late 2011, in the island's first foray to tap offshore resources.
Russian authorities have denied the Kremlin plans to offer more money.
A senior source in the "troika" said dealing with Cyprus was even more frustrating than protracted wrangling with Greece.
"The Greeks wanted to cheat on you all the time, but they knew what they wanted. The Cypriots are leaving us really confused," the source said.