Cyprus focus moves to Brussels as agreement remains elusive

By Nikos Chrysoloras

Brussels - Cypriot President Nicos Anastasiades arrived in Brussels on Sunday afternoon for talks with European Commission President Jose Manuel Barroso, European Council chief Herman Van Rompuy, European Central Bank head Mario Draghi, European Economic and Monetary Affairs Commissioner Olli Rehn and International Monetary Fund managing director Christine Lagarde.

The talks were to take place ahead of a Eurogrop meeting planned for Sunday evening as Nicosia faced a Monday deadline for agreeing a 10-billion-euro bailout in order to ensure the ECB continues to provide its banks with liquidity.

Ahead of the meeting an EU official with direct involvement in the talks told Kathimerini that there has been progress on details of a bailout agreement between Cyprus and the troika but some major obstacles remained.

The main question surrounds the future of the island’s largest lender, Bank of Cyprus. If unsecured deposits (above 100,000 euros) at all Cypriot banks are taxed then large savings at Bank of Cyprus are likely to be taxed between 20 and 25 percent. If the levy is not imposed on deposits at other lenders, the haircut for Bank of Cyprus customers will be much larger.

The option of a full bail in of Bank of Cyprus depositors is still on the table. As with the Popular Bank of Cyprus (Laiki), which is to go through a resolution process, the full bail in option could lead to deposits above 100,000 euros being lost. The only compensation for unsecured depositors will be shares in the “good” bank that will be created by a possible merger between the "healthy" Laiki and Bank of Cyprus entities.

When asked by Kathimerini how the Cypriot economy will survive if all company and personal deposits above 100,000 euros disappear from the country’s two biggest lenders, the EU official said: “Unfortunately, Cyprus’s choices are between a bad scenario and a very bad scenario.”

He acknowledged that the Cypriot economy would experience an unprecedented recession this year, regardless of the outcome of talks in Brussels. However, he added that an agreement was urgently needed by Sunday evening because “otherwise the ECB will pull the plug on the Cypriot banks.” The EU official declined to comment on the positions taken by Nicosia, saying that they are constantly changing,

According to Kathimerini sources, the German Chancellery and the ECB agree that the Cypriot economy is not systematically important for the eurozone. However, due to geostrategic and political reasons, every effort will be made to keep Cyprus in the eurozone. It seems there was intense disagreement over the geostrategic aspect between the chancellery and the office of Germany’s Finance Minister, Wolfgang Schaeuble.

If there is a failure to reach an agreement today, the worst of all scenarios should not be ruled out.