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Cyprus, creditors reach draft deal for avoiding economic collapse

March 24, 2013|By Anthee Carassava
  • Cyprus President Nicos Anastasiades leaves a special meeting in Brussels on the economic crisis in his country.
Cyprus President Nicos Anastasiades leaves a special meeting in Brussels… (Olivier Hoslet / European…)

ATHENS — After hours of tortuous threats and talks, Cyprus reached a draft deal with its international lenders Monday to keep the island’s failing banks from collapsing and its economy anchored to Europe’s single currency.

Information seeping out of the talks was both confusing and conflicting. But after 10 hours of intense negotiations in Brussels, officials from the island republic, the European Union and the International Monetary Fund said they had agreed to shut down the island’s second-biggest bank, lock down deposits of more than $130,000 and slap hefty levies on large bank deposits.

Failure to have sealed a deal would have forced the European Central Bank, according to an ultimatum it issued earlier this week, to stop funneling billions of dollars into Cyprus’ cash-strapped financial system on Monday, leaving the tiny island to fend for itself.

A first jab at a deal collapsed last week when ordinary Cypriots objected to paying a tax of up to 10% on deposits from the first penny. Although details of how much depositors stood to lose remained unclear, officials said Cyprus President Nicos Anastasiades had threatened to walk out and resign at one stage when the level exceeded 50%.

“It’s looking very difficult,” the Cyprus president told his Cabinet council and the country’s political leaders in a brief conference call, hours into the talks. “The pressure is so immense that I told them that I will walk out and resign.”

The island’s political leadership remained on standby at the presidential mansion in Nicosia, to afford Anastasiades immediate approval -– or rejection -- of the revamped bailout scheme. Finance ministers from the 17 nations using the single European currency also had to approve the deal.

To avoid bankruptcy, Cyprus needs to raise $7.5 billion to qualify for about  $13 billion in international aid, which its European peers and the IMF have pledged to finance. The initial plans to raise that amount by the 10% levy on deposits backfired last week, igniting fierce public reaction and failure to garner a single vote of support in the Cyprus parliament.

Faced with no other viable options, however, the government in Cyprus moved within hours to reconsider the initial deal as the prospect of a chaotic default and an exit from the European single currency loomed ominously over the island.

Under the draft proposal, the tiny island would avert a financial meltdown by winding down its second biggest bank, Popular Bank of Cyprus -– commonly known as Laiki. Insured deposits of less than $130,000 would be shifted to the Bank of Cyprus, creating a “good bank.”

It remained to be seen whether a proposal bandied about by Nicosia -– that wealthy depositors with more than $130,000 at the Bank of Cyprus, the island’s biggest lender -- would be assessed a one-time 20% fee.

“Whatever the final details are of the final plan, one thing is certain,” said Alexandros Apostolides, a senior analyst. “It’s not only worse than what was initially put forward a week ago, but Cyprus altogether is” in worse shape too.

Carassava is a special correspondent. 

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