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Cyprus in race against time as bank concerns grow

Thursday - 3/21/2013, 3:23pm  ET

People wait to use the ATM of a closed branch of Laiki Bank in southern port city of Limassol, Thursday, March 21, 2013. The European Central Bank says it will keep emergency aid for Cyprus' troubled banks in place at least until Monday but will have to cut it off after that unless an international rescue program is drawn up. (AP Photo/Pavlos Vrionides)

ELENA BECATOROS
Associated Press

NICOSIA, Cyprus (AP) -- As Cypriot politicians raced to find a new financial rescue plan ahead of a Monday deadline, one of the country's biggest banks put a cap on daily withdrawals after people rushed to get cash from ATMs.

Cyprus has been told it must raise 5.8 billion euros ($7.5 billion) if it is to receive 10 billion euros ($12.9 billion) from its fellow eurozone countries and the International Monetary Fund. If it does not find a way by Monday, the European Central Bank said it will cut off emergency support to the banks, letting them collapse.

That would throw the country into financial chaos and, ultimately, cause it to leave the eurozone, with unpredictable consequences for the region.

The pressure has grown since lawmakers on Tuesday rejected an earlier proposal to seize up to 10 percent of people's bank accounts. Banks have been shut since last weekend to avoid a run and will not open until Tuesday at the earliest.

Uncertainty was growing among Cypriots as the deadline approached and reports spread that the country's second-largest bank would be restructured.

Queues of 40 to 50 people formed at the ATMs of Cyprus Popular Bank, or Laiki, which responded by capping daily withdrawals at 260 euros ($340) per person from 700 euros ($906). Although ATMs have been functioning, many often run out of cash.

"We need cash. We have families, children, grandchildren and expenses, and the banks have been closed since Saturday," said Andri Olympiou after withdrawing money from a Laiki branch in Nicosia, the capital.

The central bank governor, Panicos Demetriades, urged lawmakers to vote immediately on a legal framework bill to rehabilitate Cyprus's banking sector. The bill includes restructuring Laiki.

Eurozone finance ministers were holding a phone conference Thursday night to discuss the situation.

Bank employees protested outside Parliament, chanting "Cypriots wake up! We're not selling Cyprus!" Scuffles broke out with riot police and the main road was blocked to traffic.

President Nicos Anastasiades held a series of meetings with political party leaders to consider a range of measures that could raise the necessary funds.

The "Plan B" will likely include restructuring Cyprus' troubled banks, some form of Russian help, dipping into pension funds and taking up an offer from Cyprus' wealthy Orthodox church to contribute. Some form of tax on bank deposits is also possible.

One new development Thursday was the government's announcement of its intention to create a so-called "Investment Solidarity Fund." That bill and the bank restructuring bill were sent to Parliament Thursday night for discussion. It was unclear when there might be a vote.

The fund is intended to appeal to "the patriotism of Cypriots" and draw on contributions from ordinary Cypriots, businessmen and foreign investors, said Demetris Syllouris, head of a small right-wing party who was in a meeting with the president where the "Plan B" was being hashed out.

A "Plan B" is needed after lawmakers soundly defeated the earlier proposal to seize up to 10 percent of all domestic deposits to raise the 5.8 billion euros.

"We will have a program of support for Cyprus by Monday," Demetriades said earlier in the day.

One major lender, Bank of Cyprus, appealed to the government and politicians to reach a plan that the eurozone partners would accept, clearing the way for the bailout.

"The Cypriot economy is in a marginal and fragile state. The next move could prove salutary or disastrous," the bank said in a statement. "It is imperative we immediately proceed with the drawing up of an agreement with the Eurogroup."

Russia is likely to pitch in with the new plan, though its contribution will be smaller than originally hoped for, Cypriot officials have said. Nearly a third of the 68 billion euros ($88 billion) in deposits in Cyprus' oversized banking sector are held by Russians.

Cyprus' finance minister, Michalis Sarris, has been in Moscow since Tuesday seeking to forge a deal. Russia's help would not be a loan, but rather some form of an investment, he said.

Russia news agency ITAR-Tass quoted Sarris as saying "we are discussing the subjects of gas, bank cooperation and other subjects." Cyprus has recently discovered significant off-shore gas deposits, and major energy companies have shown an interest in tapping those resources.

In Brussels, the head of the 17-nation eurozone's finance ministers Jeroen Dijsselbloem, said that a one-time tax on bank deposits was "inevitable" given Cyprus' oversize financial sector. He argued, however, that the burden should be shifted toward taxing big bank deposits of more than 100,000 euros.

An amended bill that would have exempted deposits of under 20,000 euros in the bank was turned down by lawmakers Tuesday.

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Petros Giannakouris in Nicosia, Juergen Baetz in Brussels, David McHugh in Frankfurt and Jim Heintz in Moscow contributed to this report.


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