The Cypriot government submitted a series of bills to the parliament in Nicosia on Thursday foreseeing the creation of a national solidarity fund and the winding down of the country’s largest lender, Cyprus Popular Bank (Laiki), in a bid to secure a bailout from the eurozone and the International Monetary Fund that would prevent the collapse of the island’s financial sector next week.
Already scrambling for a solution to a funding gap of 5.8 billion euros, more pressure was put on Nicosia on Thursday by a statement from the European Central Bank that on Monday it would cease to lend to any insolvent Cypriot banks. This meant that Laiki would collapse.
The ECB’s threat spurred Cyprus’s political leaders into more frenzied action and by the afternoon they had agreed on the formation of an investment fund that would be securitized with social security fund reserves, state assets, Church property and expected natural gas revenues. The formation of the fund was included in legislation submitted to the House of Representatives.
Another key bill also contained the plan for placing Laiki in resolution. It foresees the lender’s nonperforming loans being transferred to a “bad bank” and deposits under 100,000 euros, which are guaranteed, being placed in a “good bank.” Uninsured deposits would be placed in the bad bank.
The deputy leader of President Nicos Anastasiades’s conservative DISY party, Averof Neophytou, said that the winding down of Laiki would save Cyprus 2.3 billion euros, leaving it to find another 3.5 billion from other sources in order to reach an agreement with the troika for a 10-billion-euro bailout. He added that 361,000 out of 379,000 accounts in the bank contain less than 100,000 euros. He also said 8,000 jobs at the lender would be saved.
The debate in the Cyprus Parliament started shortly after scuffles outside the building between riot police and staff and depositors at Laiki who had heard the lender was being shut down. Due to liquidity concerns, cash withdrawals from the bank’s ATMs were limited to 260 euros.
The governor of the Central Bank of Cyprus, Panicos Demetriades, said that without the resolution process, Laiki “would be driven to immediate bankruptcy and termination of business, with devastating consequences for employees, depositors as a whole, our banking system and the economy.”
Following a Eurogroup conference call on Thursday night, eurozone finance ministers said in a statement they were prepared to discuss Cyprus’s new plan, urging Nicosia to have it ready “as soon as possible” so it could be reviewed by the troika.
“After the conclusion of such negotiations the Cyprus authorities should begin legislating the elements of such an agreement,” said the statement, adding that deposits under 100,000 euros should be guaranteed.
In Russia, Finance Minister Michalis Sarris was holding talks with his counterpart Anton Siluanov on Thursday night. Energy Minister Giorgos Lakkotrypis was also taking part in the talks. The meeting appeared to be the last throw of the dice from Nicosia in its effort to convince Russia to improve the terms of an existing 2.5-billion-euro loan and to invest further in the Cypriot economy.
Sarris made it clear that Cyprus was not seeking a new loan from Moscow and had given up on the prospect of convincing the Russians to invest in the island’s banks. The possibility of Russia investing in Cyprus’s solidarity fund could not be discounted but Nicosia would likely have to provide access to natural gas or a naval base, or both, in return.
Russian Prime Minister Dmitry Medvedev reiterated his anger on Thursday at the initial decision by Cyprus and the Eurogroup to impose a tax on deposits at Cypriot banks. He added that Nicosia would face lawsuits from Russia if its depositors end up losing money as part of any solution.