Exhausted Cypriot lawmakers on Saturday wrestled with how to raise billions of euros to qualify for an urgently needed financial rescue, just a day after they passed nine bills in a desperate attempt to keep the tiny island nation's finances from collapsing.
Members of parliament have been working virtually non-stop this week to meet a Monday deadline for raising €5.8 billion ($7.5 billion), which is the condition the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Union (EU), collectively known as the troika, are demanding before they extend Cyprus a €10 billion loan so the island nation can rescue its banks and avoid defaulting on its sovereign debt, catastrophes that would likely result in it heaving to leave the euro zone.
The ECB is warning that unless Cyprus comes up with €5.8 billion by Monday it will cut off the emergency cash supply that is the only thing keeping the country's banks solvent.
Unlike the troika's recent bailouts of struggling euro zone members, it is -- for the first time -- demanding that citizens of a financially failing nation contribute to their own rescue. In other words, despite the relative smallness of the proposed rescue, the troika is demanding that ordinary Cypriot citizens, not just big institutional bond holders, surrender significant amounts of money.
One reason for its tough stance is that Cyprus is the fifth euro zone member to be rescued in five years, and the troika wants to send a message that there is a limit to its largesse. Another reason may be that nearly a third of deposits in Cyprus banks are believed to be held by disreputable Russian oligarchs seeking shelter for fortunes made in legally dubious ways.
Last weekend lawmakers accepted those terms, only to reverse themselves on Tuesday in the face of their constituents' rage and a threatened run on the country's banks.
Cypriots were infuriated when they learned that a key part of parliament's original plan for raising €5.8 billion was assessing a one-time levy of 6.75 percent on bank balances of €100,000 or less and 9.9 percent on balances of more than €100,000. When word of the plan was made public, Cypriots rushed to automatic teller machines to keep the government from taking their money. But even that offered little comfort: Depositors could only remove €260 at a time. In response, the government has kept banks closed for a week, with tentative plans to let them reopen on Tuesday.
On Friday lawmakers passed nine bills, one of which clamps down on capital flight and others that facilitate the restructuring of the country's two biggest banks. The idea is to move the good assets of the second-largest bank, known as Laiki, into the largest bank, Bank of Cyprus, and shunt Laiki's bad loans into a separate entity for disposal later.
Closing Laiki would relieve Nicosia of the expense of propping it up it, thus theoretically reducing the amount the troika would require to about €3.5 billion. It was not clear, however, that the troika would accept restructuring the bank as sufficient to lower its demands for Cyprus to raise the full €5.8 billion.
The planned downsizing of the banks would also be a blow to the Cypriot economy, which is less than €18 billion, and which has been built around a financial services industry that is now seven times the size of the nation's economic output, in terms of assets, the Wall Street Journal said.
In addition, parliament on Friday voted to nationalize pension funds of state-owned companies to raise about €2 billion that could be applied toward the needed €5.8 billion. But Germany, which, as Europe's richest economy, largely bankrolls the troika's rescues, quickly criticized the move as unacceptable.
Several proposals circulated on Saturday for raising money. One spared bank balances of €100,000 or less but aimed to take 20 percent to 22 percent of balances above that amount; another raised those percentages to 40 percent. Measures such as these would hammer Russian depositors, but Moscow rejected appeals this week from Nicosia to help it avoid having to take such extreme steps.
It also appeared that the original plan reached last weekend remained under active consideration.
Meanwhile, Greece arranged for one of its biggest banks, Piraeus Bank, to take over the Greek-based units of Cyprus’ three main banks, the New York Times said, relieving its neighbor of the cost of supporting those units and ensuring that Greek depositors in those banks would be insulated from whatever bailout terms might be reached.
Stock and bond markets this week have appeared largely unconcerned about contagion -- the on-again-off-again fear that Cyprus' banks failing, Nicosia's defaulting on its sovereign debt and the euro zone losing its smallest member could have knock-on effect in Italy and Spain, the next weakest members of the 17-member monetary union.