The struggle for Cyprus

A protester shouts slogans during a rally by employees of Cyprus Popular Bank outside the parliament in Nicosia March 21, 2013 Bank employees are among those protesting outside the parliament in Nicosia

There is a fierce struggle going on between the elected government of Cyprus on one side and Germany and European officials on the other.

The tension is not disguised. Many Cypriot MPs believe they are being blackmailed into doing what the eurozone wants.

European officials are furious. They say the troika (the EU, the IMF and the ECB) has been ignored. They resent the fact that Cyprus turned to Moscow before Brussels this week.

Cyprus has been given a deadline by the European Central Bank (ECB): agree a bailout programme with the eurozone and IMF by Monday or funding for the banks will be withdrawn. The consequence would be the collapse of the banking sector and a possible exit from the euro. This is brutal power politics.

Difficult choices

The Cypriot government is racing against the clock to come up with a plan which will raise sufficient funds for the country to qualify for an EU/IMF bailout. Some of the details are known:

1. Restructuring the banks: Under this plan the Laiki (or Popular) Bank would be split into a "good" and "bad" bank. Deposits under 100,000 euros (£85,269) would be protected in the "good" bank. Larger deposits would be placed in the "bad" bank and would take substantial losses. The Germans favour this idea and want to see larger depositors share in the cost of saving Cyprus.

2. Investment fund: The government wants to set up an investment fund which investors - perhaps Russia - can buy into. The plan is to put pension funds, Church assets and money from future gas reserves into the fund. The Germans are unconvinced by this plan and Chancellor Angela Merkel indicated today that nationalising pension schemes as a way of raising money was not acceptable.

3. Transactions: There would be controls on bank transactions to stop a run on the banks with money being taken out of Cyprus.

The target is to raise 5.8bn euros ($7.5bn; £4.9bn) and so qualify for a 10bn-euro rescue loan from the EU/IMF.

The underlying tension remains. The Germans want large investors - many of them Russians - to share in the cost of bailing out Cyprus. They want the Cypriot banking sector scaled back. The Cypriots are desperate to protect their financial sector, which is so important to the island's economy. If large depositors are hit hard the fear is that the financial industry will be destroyed.

Many Cypriots believe that is precisely what Brussels wants.

Legacy of bitterness

The Europeans believe that no plan is workable unless large depositors face a tax of at least 9.9% on their accounts. Under all the current plans those bank customers with accounts holding less than 100,000 euros will be spared.

Whatever the outcome the legacy will be one of bitterness. I have seen anti-German posters and heard anti-German rhetoric in Greece, Spain, Italy and Portugal. But never has it been so open as in Cyprus. And that resentment extends to the EU. "They've brought us to the brink," said one bank worker this morning, "the Europeans wanted to destroy our economy and they've done it".

Even if the Germans are right - and the Cypriot banking sector needs cutting in half - they are perceived as bullying outsiders.

This crisis has revealed yet again the faultline at the heart of the euro. Economic and monetary union has yoked together very different economies and cultures.

The stress of trying to blend them together is putting the European project under severe strain. Some economies are in a depression and the political fallout from this still lies ahead.

Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 547.

    Germany wasn't taken by surprise when Greece and others got in trouble. They were there every step of the way helping

    The bottom line is this: Germany would much rather see a EU financial crisis than a German financial crisis. Hence the mafia-like conditions on their loans to fellow members that have no other choice. This thanks to the giant weight hanging round their necks called the euro.

  • rate this

    Comment number 546.

    #537 David

    " These same banks can borrow Euros very cheaply then make the loans for greatly increased rates."

    --American banks dollars and UK banks pounds --QE ?

  • rate this

    Comment number 545.

    543. sieuarlu

    She has a knack of doing such. Very happy to bring you to account if you reply negatively to her posts and particularly if it is something that she has written that is glaringly wrong. Been on the end of the occasionally!

    Goodnight everyone. Stay safe wherever you are.

  • rate this

    Comment number 544.

    Berezovsky. aged 69, found dead at his home.

    They come to London attracted by its status as the money laundering capital of the world and then meet their end one after another.

    Now that London seems to have become very dangerous for rich Russians and Cyprus might well be out of bounds very soon, where will they go?

    Agatha Christie would have had a field day. Poor Boris, who next?

  • rate this

    Comment number 543.

    535Everyone write March 23, 2013 down as a day when Margaret Howard posted on BBC where she did not blame the US for everything from the extinction of the dinosaurs to Eve tempting Adam with the apple that got them thrown out of Eden and god angry at humanity. What happened Margaret, you feeling okay? Did you have a momentary faint spell? But I see you're back to form so don't worry anybody.


Comments 5 of 547


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