Political leaders in Cyprus have agreed that their country should form an investment fund to raise the capital needed to agree a bailout with the eurozone and International Monetary Fund and avert a collapse of its banking system.
The deputy leader of Cyprus’s conservative DISY party Averof Neofytou announced the agreement within a few hours of the European Central Bank saying that it was set to cut off lending to insolvent Cypriot banks on Monday.
“We will find a solution,” said Neofytou. “We have no other choice. We are making a united effort to avoid our country’s bankruptcy and I think we will succeed.”
Nicosia plans to create a fund collateralized by state assets, possibly including natural gas revenues, church property and social security fund reserves. A proposal is due to be submitted to the House of Representatives on Thursday evening.
A government official who declined to be named told Bloomberg that some kind of deposit tax was not being ruled out.
Meanwhile, Finance Minister Michalis Sarris continued talks in Moscow, with Cyprus hoping there would be Russian interest in Cypriot banks or in contributing to the investment fund being created.
Sarris told Cypriot state broadcaster that he would meet two Russian ministers on Thursday evening and that the main aim would be to convince Moscow to invest in the wealth fund to be set up by the Nicosia government.
“We are asking for help clearly, but something that would make also economic sense for Russia,” Sarris told reporters earlier.
Cyprus is also asking Moscow to extend the maturity of an existing 2.5-billion-euro loan. Sarris said that Russia was unable to provide Cyprus with a new loan.
Neofytou said that Cyprus would welcome Russian assistance but still needed to balance this against the requirements of remaining in the eurozone.
“We cannot reject any form of help but we are in the euros and we need the continue support of the ECB for liquidity,” he said. “Any support is welcome but we should not forget that we are in Europe and we need European institutions to stabilize our economy.”
Earlier, the ECB warned Cyprus on Thursday morning that the island’s banks might not qualify for emergency lending when they reopen next week.
“The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013,” it said in a statement.
“Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks.”
It is thought Cyprus Popular Bank (Laiki) – the island’s largest lender - would not be eligible for emergency funding under the ELA terms as it would be deemed insolvent.
The head of Cyprus’s central bank believes that a solution to the impasse between Nicosia and the troika will be found by Monday in order for the two sides to agree a bailout.
“I expect that there will be a support program for Cypriot economy by Monday,” said Panicos Demetriades after talks with President Nicos Anastasiades on Thursday.
Speaking to a European Parliament committee, Eurogroup chief Jeroen Djisselbloem said he felt a solution including some kind of deposit levy would be found.
“I'm not sure that this package is completely gone and failed, because I don't honestly see many alternatives,» he said. «There is of course a different way to do the levy, and we're very open to a more fair approach to the way the levy is structured."
The Dutch finance minister said that the eurozone had taken too long to address the problems with the Cypriot banking model. He expressed concern about the consequences of the instability created in Cyprus.
“In the present situation I think there is definitely a systemic risk and I think the unrest of the last couple of days has proven this, unfortunately,» he said