The European Central Bank yesterday threatened to withdraw emergency funding from Cyprus 's banks by Monday, effectively setting a deadline for the Mediterranean island to formulate a new bailout proposal.
The ECB, which has been supporting Cyprus’s banks with emergency liquidity assistance, said the government had until Monday to get a deal in place. “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 said.
Representatives from the ECB were working on ways to reopen the banks “as soon as possible”, eurogroup president Jeroen Dijsselbloem said, adding that various instruments were being considered to “calm the situation”, amid fears of a bank run when banks reopen on Tuesday.
Euro zone officials declined to comment on reports of various proposals that were believed to be on the table to restructure Cyprus's banking sectors, including the merging of its two main banks, Laiki and Bank of Cyprus, and the creation of "good" and "bad" banks.
As frantic discussions continued in Nicosia between Cypriot authorities and troika representatives on an alternative proposal to the deal rejected on Tuesday, euro zone finance ministers were on standby to travel to Brussels for an emergency meeting if requested.
“I certainly wouldn’t exclude any meetings in the next few days,” said one European official, ahead of a conference call between finance ministries last night.
While officials in Brussels said it was now up to Cyprus to put forward a new proposal, they stressed that the proposal should be “credible and viable”. Mr Dijsselbloem hinted at some of the conditions that could be demanded by euro zone authorities as part of the new proposal, saying it was “inevitable” that the final package would include a levy.
He stressed that the eurogroup’s preferred option had been to protect deposits under €100,000.
The Cypriot government has so far been resistant to the notion of taxing deposits over this threshold for fear of damaging the country’s standing as a financial sector.
“The vast majority of depositors in Cyprus are not really savers, they’re investors,” Mr Dijsselbloem told a European Parliament committee in Brussels yesterday. “We should look for an outcome that is more fair. I’ve said this before and hope that the Cypriot authorities will put forward proposals along that line.”
The Dutch finance minister said that euro zone finance ministers should have communicated better the distinction between the Cypriot deposit tax proposal and the deposit guarantee scheme, noting that the proposal to tax Cypriot deposits was a one-off fiscal measure.
However, he said the eurogroup “felt it justified” to put a tax on non-resident deposit holders. “Many of the tax measures would have primarily touched on the local people, whereas the banking sector has a large share of non-resident large deposit holders,” he said.
“The euro zone stands ready to deliver . . . support, but in order for it to sustainable, there needs to be an element of burden-sharing from the Cypriot side.”
