ECB issues ultimatum to Cyprus

Back to the drawing board for Cyprus
Back to the drawing board for Cyprus

    JUST WATCHED

    Back to the drawing board for Cyprus

MUST WATCH

Back to the drawing board for Cyprus 03:59

Story highlights

  • n a short statement the ECB said its 23-person governing council had agreed to maintain emergency liquidity
  • The ultimatum came as EU leaders maintained pressure on Nicosia to come up with a new plan
  • The latest plan calls for a 5 per cent levy on deposits above €100,000 to raise about €3bn

The European Central Bank raised the stakes in the Cyprus crisis on Thursday, telling Nicosia it had until Monday to agree a bailout with the EU and International Monetary Fund or it would cut off emergency liquidity provision to the country's banks.

The hardline stance from the ECB sets a clear deadline for Cyprus to agree to a plan after its parliament rejected a bailout negotiated at the weekend that would have taxed the deposits of account holders in the country's banks.

The ultimatum came as EU leaders maintained pressure on Nicosia to come up with a new plan on its own and Russian prime minister Dmitry Medvedev told a visiting European Commission delegation that a solution had to include Russian participation.

"It is now up to the Cypriot authorities to come up with proposals," Jeroen Dijsselbloem, chair of the committee of 17 eurozone finance ministers who negotiated the bailout, told the European Parliament on Thursday morning.

In a short statement the ECB said its 23-person governing council had agreed to maintain emergency liquidity provision to Cyprus's banks until Monday. "Thereafter, Emergency Liquidity Assistance could only be considered if an EU-IMF programme is in place that would ensure the solvency of the concerned banks," it said.

Cyprus looks to Russia for aid
Cyprus looks to Russia for aid

    JUST WATCHED

    Cyprus looks to Russia for aid

MUST WATCH

Cyprus looks to Russia for aid 02:54
Cyprus in financial crisis
Cyprus in financial crisis

    JUST WATCHED

    Cyprus in financial crisis

MUST WATCH

Cyprus in financial crisis 03:24
Why Russia is upset with Cyprus tax
Why Russia is upset with Cyprus tax

    JUST WATCHED

    Why Russia is upset with Cyprus tax

MUST WATCH

Why Russia is upset with Cyprus tax 03:21

The country's two biggest banks, Bank of Cyprus and Laiki, are believed to be reliant on Emergency Liquidity Assistance provided by the Central Bank of Cyprus. The ECB's governing council can terminate ELA if it believes the banks receiving it are no longer solvent.

The move, however, raises the prospect of the ECB having to make good on its ultimatum on Monday, which could leave the banks unable to honour their obligations. Some analysts have speculated that the collapse of the banks could trigger a series of events that lead to Cyprus leaving the euro, with unpredictable consequences for the rest of the eurozone.

Speaking in Brussels, Mr Dijsselbloem said Cyprus represented a systemic threat to the eurozone -- further underscoring the danger of an escalation. In a hearing before the European Parliament, he defended the ECB's decision, saying the central bank was only acting within its mandate not to fund insolvent financial institutions.

"I don't think the ECB is using threats," Mr Dijsselbloem said. "The ELA facility can only be made available to banks that are [solvent]. There has to be at least the prospect in the near future of a programme of recapitalisation, of bringing these banks within a safe haven again."

Cyprus's political leaders on Thursday discussed a new proposal for a modified levy on bank deposits and the establishment of a "national salvation" fund to cover the country's contribution to a €10bn bailout agreed with international lenders.

If approved by the "troika" -- officials from the EU, European Central Bank and International Monetary Fund -- the plan would be put to a vote in parliament later in the day.

"We have to rescue the country, regardless of the sacrifices needed," a government spokesman said. But after Tuesday's overwhelming rejection by lawmakers of an earlier version of the levy, the government's chances of scraping a parliamentary majority looked slim.

The latest plan calls for a 5 per cent levy on deposits above €100,000 to raise about €3bn. Smaller accountholders would not be affected.

The remainder of Cyprus's €5.8bn share of the bailout would come from the new fund, which would include some reserves of state pension funds, state property holdings and the proceeds of a bond backed by future revenues from exploiting offshore gas deposits.

Mr Dijsselbloem said that although he did not know whether Cypriot officials had made progress in Moscow where talks were ongoing, Russian officials had previously indicated they were only willing to restructure an outstanding €2.5bn loan to Cyprus to lower the interest rate and extend its repayment schedule. He said they were not willing to invest in Cypriot banks or lend the country additional money.

"If the Russians want to say they could lend more, that wouldn't help," Mr Dijsselbloem said. "Building up debt in Cyprus doesn't help them in the future."

Speaking in Moscow following a meeting with his Russian counterparts including President Vladimir Putin, José Manuel Barroso, the European Commission president, attempted to counter Russian criticism that the Kremlin should have been consulted on the deal, saying the levy on large depositors was the result of all-night negotiations where nobody knew the result beforehand.

"Russia was not informed also because the governments of Europe were not informed -- let's be completely open and honest about that issue," Mr Barroso said. "There was not a pre-decision before the eurogroup meeting . . . of course, here in Russia today, I will be, of course, as always, open to listen to the concerns of our Russian partners."

Cypriot finance minister Michael Sarris was meeting for a second day on Thursday with his counterpart Russian finance minister Anton Silouanov to discuss rescheduling the $2.5bn Russian loan which is due in 2016. He said they were also discussing co-operation in the banking and energy sectors, adding that any deal to solve the island's debt crisis should also be in Russia's interests.

"There's a lot of teams now working on a number of issues. Banks, natural gas, are opportunities [on which] we can base some co-operation and some support from Russia," Mr Sarris told reporters in Moscow on Thursday.

In an interview with Russian business daily Vedomosti, Cypriot central bank governor Panicos Demetriades said the amount of Russian deposits on Cyprus was lower than previously thought, and put the figure at between €5bn and €10bn "depending on how you count it."

It is understood that one option suggested by Mr Sarris was an additional loan of €5bn which would be collateralised by assets in Cyprus. Vedomosti quoted unnamed Russian officials as saying they saw no immediate value in any of the investments in Cyprus, but that they were continuing the talks.