Dreaded deposits levy now appears island's only hope
EUROPEAN leaders argued bitterly into the early hours over the future of Cyprus, proving again that they cannot reach agreement on bailouts until their backs are pressed to the wall.
As Europe wakes up to another crisis hangover, two things are clear: the reputation of Cyprus as a player in the financial services sector has been damaged, while the bonds of European solidarity have been further frayed.
Cyprus' central bank last night imposed a daily withdrawal limit of €100 from ATMs of the country's two largest lenders, Bank of Cyprus and Laiki, to prevent a bank run by depositors worried about their savings.
Laiki had already imposed a limit of €260 after its ATMs were swarmed by alarmed customers. All Cypriot banks have been shut for the past week, but ATMs have been disbursing money.
The latest talks have left Cyprus isolated, and infuriated other small countries dependent on financial services such as Luxembourg and Malta.
In barbed remarks that highlighted how trust is evaporating, Luxembourg took aim at Germany yesterday, saying not every European country could export cars and weapons.
Amid rumours that he was set to quit, Cypriot President Nicos Anastasiades met eurozone leaders yesterday in late-night talks aimed at saving the Mediterranean island from financial meltdown.
"Negotiations continue. We are doing our utmost for #Cyprus," he tweeted from Brussels.
Cyprus was told it must reach a deal by today to avert a collapse of its banking system and get a €10bn bailout after a first attempt collapsed last week.
A threat by the European Central Bank (ECB) to cut off emergency financing for the island's tottering banks today left Cyprus with the stark choice of bowing to the creditors' aid conditions or heading towards a disorderly default.
Finance Minister Michael Noonan said yesterday evening that a deal was likely. "I think it will be done tonight, but I think it will be late," he added.
While a deal seemed likely late yesterday, the omens were not good earlier. Cypriot political parties remained divided after talks in Nicosia broke up without a result.
Mr Anastasiades flew to Brussels in a private jet sent by the European Commission ahead of a crunch meeting of eurozone finance ministers.
The key unresolved issues were how Cyprus should raise €5.8bn from its banking sector towards its financial rescue. The only real answer on the table was a levy on deposits over €100,000.
Analysts warned that failure to clinch a deal could cause a wider financial market sell-off, but some say the island's size – it accounts for 0.2pc of the eurozone's economic output – means contagion would be limited.
German finance minister Wolfgang Schaeuble said there had been little progress since last weekend's attempted bailout deal involving a levy on bank deposits, which the Cypriot parliament overwhelmingly rejected, but he hoped people in Cyprus now had "a somewhat realistic view of the situation".
Asked what a solution would look like, he said: "What we agreed last week."
The probable levy on bank deposits represents an unprecedented step in Europe's handling of a debt crisis.
European governments have wrangled over aid for Cyprus for nine months, exposing holes in the euro's revamped economic management system that was built, piece by piece, since Greece's ballooning deficit triggered the crisis in late 2009.
In Nicosia yesterday, hundreds of people marched to the country's parliament before a rally outside the EU's offices nearby.
Cyprus must raise €5.8bn itself before Europe will agree to the bailout, but plans to do this by raiding bank deposits have proved hugely controversial.
A rescue plan agreed last weekend fell because of opposition to a levy on all accounts holding above €20,000.
Despite this, a revised proposal, which would see at least 20pc levied on accounts holding €100,000 at Bank of Cyprus, was back on the table last night. Such a move would disproportionately affect big Russian investors in the country.
Irish lawyer Thomas Keane, who represents several Russian companies with investments in Cyprus, said it could lead to at least €9bn being withdrawn and moved elsewhere. (Addi-tional reporting, Reuters)