European policy makers weighed how far to push Cyprus after lawmakers in the Mediterranean nation rejected an unprecedented levy on bank deposits, throwing into limbo a rescue package designed to keep it in the euro.
Stocks and the euro gained as investors speculated that the European Central Bank, whose Governing Council meets today in Frankfurt, will continue to support the country’s banks until next week. Chancellor Angela Merkel, saying she “regrets” the Cypriot parliament’s decision, signaled a willingness to engage with Cyprus as long as its banks contribute to a bailout.
“It’s important that Cyprus has a sustainable banking sector,” Merkel told reporters in Berlin. “Cyprus is our partner in the euro area and therefore we are obliged to find a solution together.”
Cyprus’s rejection of the levy followed days of recrimination sparked by European plans to force depositors in the country to shoulder part of the bailout with their savings. Cypriot President Nicos Anastasiades returned from marathon talks in Brussels on March 16 saying the alternative would be the “indescribable misery” of the ECB cutting off funding to one of its banks.
The euro, which fell to almost a four-month low yesterday, strengthened for the first time in three days, rising 0.4 percent to $1.2939 at 1:54 p.m. in Frankfurt, after the ECB pledged to provide liquidity to Cyprus. European stocks advanced, with the Stoxx Europe 600 Index gaining 0.4 percent.
Officials from the troika of international creditors -- the ECB, the International Monetary Fund and the European Commission -- are in Cyprus discussing further capital controls and possibly extending a bank holiday to the end of the week, a European official familiar with the talks said on condition of anonymity because the discussions are confidential. March 25 is Greek Independence Day, and a national holiday also in Cyprus.
ECB Executive Board member Joerg Asmussen said the central bank can “only provide emergency liquidity to solvent banks,” according to an interview in German newspaper Die Zeit. Cyprus bank solvency “can’t be considered a given unless an aid package, which ensures a fast recapitalization of the banking sector, is agreed soon,” Asmussen was cited as saying.
After the vote, focus also shifted to Russia, whose companies and individuals have an estimated $31 billion of wealth in Cyprus, according to Moody’s. Cypriot Finance Minister Michael Sarris missed yesterday’s ballot as he flew to Moscow to hold talks about financial assistance.
Russia and Cyprus are in the midst of loan discussions, Sarris said after meeting his counterpart, Finance Minister Anton Siluanov. The talks included “things beyond that,” Sarris said, when asked about extending the term of an existing 2.5 billion-euro loan from Russia or a new credit.
Negotiations will take “as long as it takes,” Sarris told reporters after meeting Siluanov. Discussions with First Deputy Prime Minister Igor Shuvalov yielded no results, Russian state- run news service Prime reported.
Russian President Vladimir Putin this week called the called the Cyprus levy “unfair, unprofessional and dangerous.”
The 17 euro finance ministers, who pulled together the deposit-levy deal after 10 hours of negotiations March 15-16, should reconvene as soon as possible, Luxembourg Finance Minister Luc Frieden said yesterday in an interview.
“This is not a good result -- neither for Cyprus, nor for the euro zone, and we have to look together for alternatives to the negotiated package,” Frieden said by phone from Frankfurt.
Dutch Finance Minister Jeroen Dijsselbloem, who chairs the meetings of finance ministers, said the euro group “stands ready to assist Cyprus.” The European Commission called on Cyprus to come up with an alternative method of financing.
“The ball lies squarely in Nicosia,” German Finance Ministry spokesman Martin Kotthaus told a regular government press conference in Berlin.
The deposit levy drew worldwide criticism that it broke a taboo over the safety of bank-deposit savings and risked launching a bank run in other European countries. Cypriots awoke March 16 to find bank transfers blocked, prompting images of long lines at ATMs.
While the island country accounts for less than half a percent of the euro-region economy, the fight over the bank tax risks triggering new turmoil in the financial crisis that began in 2009 in Greece.
“It has some symbolism impact on Europe, but it’s not a really major economic issue,” Laurence D. Fink, the chief executive officer of BlackRock Inc., the world’s largest asset manager, said in a Bloomberg Television interview in Hong Kong today. “It does remind us of the frailty of Europe. It does remind us that the European fix will be multiple years.”
Anastasiades met with political party leaders in Nicosia today as Cyprus’s banks and stock exchange remained closed. The parties have put together technical teams who will meet at the Central Bank of Cyprus to discuss a “plan B” with central bank officials on how to raise the 5.8 billion euros needed, Christos Stylianides, a government spokesman, said.
Protesters in the capital cheered outside the parliament as lawmakers rejected the proposal with 36 votes against and 19 abstentions. No legislators voted in favor. The bill softened the original levy of 6.75 percent on all accounts below 100,000 euros by exempting those with less than 20,000 euros. Deposits exceeding 100,000 would be taxed at a 9.9 percent rate.
The ECB’s support for Cyprus’s banks could now come into focus. Cypriot government bonds became ineligible as collateral in refinancing operations in June last year, after all three major ratings agencies had downgraded Cyprus to junk status.
That forced Cypriot banks to turn to so-called Emergency Liquidity Assistance from the Central Bank of Cyprus. Under ELA, the national central bank may continue to lend to commercial banks at a higher interest rate and only with the permission of the ECB’s Governing Council.
Should the ECB consider the situation untenable, it could refuse to sanction the provision of further liquidity. The central bank said in a statement after yesterday’s vote that it would continue to provide funding as needed “within the existing rules.”