ECB Sets Ticking Clock For Cyprus Bailout

on March 21 2013 3:19 PM
ECB Draghi 2012 2
European Central Bank President Mario Draghi. Reuters

The Mediterranean island nation of Cyprus has until Monday, March 25, to agree to European Central Bank and International Monetary Fund bailout conditions, or its illiquid banks will be cut off from emergency funding. If the funding is cut, economists expect the country’s top banks to collapse. Aside from the obvious economic catastrophe this would cause Cyprus, the event would shock the euro zone’s already fragile economy and could negatively impact global markets.

If it seems dramatic, well, it really is. Reuters reports that on a conference call held by the Eurogroup Working Group — a consortium of deputy finance ministers and senior treasury officials — there was talk of Cyprus leaving the euro zone. Officials mentioned the need to “ring-fence” the rest of the euro zone in the event that Cypriot banks collapse to shield particularly weak economies like Greece from any fallout.

What is uniquely concerning, and has grabbed the attention of observers around the world, is the fact that Cyprus decided not to take part in the call. According to notes seen by Reuters, the French representative said that “The (Cypriot) parliament is obviously too emotional and will not decide on anything, if Cyprus does not even feel that they can attend the call it is a big problem for us.”

Complicating the matter further is a widely-feared bank run, which in and of itself would prove to be a major negative shock to the system. Cypriot banks have been closed since Saturday when the conditions for the bailout were first made public. As initially proposed, a 6.7 percent levy would be charged against bank deposits below 100,000 euros ($129,160), while a 9.9 percent charge would be levied on deposits greater than that.

An edited version of the proposal would waive the levy on deposits of less than 20,000 euros ($25,830). The levy would be used to finance 58 percent of the 10 billion euro ($12.92 billion) bailout package that officials determined was the maximum amount of debt that Cyprus could assume.

However, aside from the fact that most depositors feel like the levy amounts to robbery, the strategy flies in the face of euro zone depositor’s insurance on amounts up to 100,000 euros. Critics are concerned that a successful levy would set precedent for such a measure to be used against other nations seeking bailouts.

Possible plan B solutions to the bailout conundrum include receiving assistance from Russia. As it stands, it seems like little progress has been made on that front. There is speculation that Cyprus could trade offshore oil and gas rights for emergency funding.

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