Cyprus MPs in key bailout talks

Cypriot reaction: "No-one knows what is going on"

MPs in Cyprus have voted to restructure the island's banks, set up a "national solidarity fund", and establish capital controls to prevent a bank run.

Efforts continue to reach consensus on other key issues such as levies on bank deposits.

Cypriot President Nicos Anastasiades is to hold talks in Brussels with the EU before Cyprus's parliament reconvenes.

Cyprus needs to raise 5.8bn euros (£4.9bn; $7.5bn) to qualify for a 10bn-euro bailout.

On Friday, the Cypriot parliament passed a total of nine bills, covering three main elements of the rescue plan including:

  • Restructuring of the banking sector, starting with the most troubled bank of all - Laiki (Popular) Bank, the country's second largest
  • The creation of a solidarity fund: nationalising pension funds and other state assets
  • The approval of capital controls to prevent large fund withdrawals out of Cyprus

The bank levy issue may come before parliament later in the weekend. A levy, possibly of around 15%, on all deposits over 100,000 euros, has been suggested.

Analysis

The eurozone is really turning the screw on Cyprus, and it's being led by Germany.

The message is crystal clear - your economic model has to change. They will no longer accept the idea of a national economy within the eurozone that is dependent on its reputation as an offshore tax haven.

There is huge irritation with the way the Cypriots have handled things, and that has led to the imposition of deadlines which mean big decisions need to be taken very quickly.

The cost of cleaning up the Cypriot banking system must be borne by investors in the Cypriot banking system - like it or lump it.

The "solidarity fund" would allow the pooling of state assets for an emergency bond issue, reports the Reuters news agency.

These include future gas revenues and some pension funds - an idea that German Chancellor Angela Merkel has strongly condemned.

Under the bank restructuring, Cyprus' troubled lenders will be split into so-called good and bad banks.

Before the series of much-delayed votes in an emergency session of parliament, the European Union, Germany and leading bankers all urged MPs to speedily pass the reforms.

Eurozone finance ministers have called a meeting on Sunday to discuss the Cyprus crisis.

The European Central Bank has given Cyprus until Monday to raise the bailout money, or it says it will cut off funds to the banks, meaning they would collapse, possibly pushing the country out of the eurozone.

The EU has postponed next week's summit to discuss free trade with Japan, so European leaders can concentrate on trying to solve the Cyprus crisis.

Banks on the island have been closed since Monday and many businesses are only taking payment in cash.

There were protests outside parliament on Friday.

'Playing with fire'

Before Friday's parliamentary session, government spokesman Christos Stylianides said the authorities were engaged in "hard negotiations with the troika", made up of the EU, the European Central Bank and the International Monetary Fund.

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This crisis has revealed yet again the faultline at the heart of the euro”

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Cypriot Finance Minister Michael Sarris returned from Moscow on Friday, having failed to garner Russian support for alternative funding methods.

He said a levy "of some sorts" remained "on the table" despite widespread fury among both ordinary savers and large-scale foreign investors, many of them Russian. Russia is a key investor in Cyprus.

One of Ms Merkel's allies in parliament, Volker Kauder, said nationalising pension funds would be "playing with fire".

He said it could not happen because it would hurt what he described as "the pensioners, the small people".

Correspondents say Germany is saying that Cyprus cannot expect any more help from Berlin, or Brussels, than what has already been offered.

'Door open'

Some help has been forthcoming, with the announcement that Greece's Piraeus Bank would take over the local units of Cypriot banks. This would safeguard all the deposits of Greek citizens in Cypriot banks.

Mr Stylianides urged the country's MPs to "take the big decisions" to prevent a financial meltdown.

"We must all assume our share of the responsibility," he said.

Eurozone bailouts - graphic

Leading Cypriot bankers have urged parliament to accept a levy on bank deposits, as originally proposed under the bailout, but with smaller depositors exempted.

The plan, overwhelmingly rejected on Tuesday, would have made small savers pay a 6.75% levy, while larger investors would have paid 9.9%.

Bank of Cyprus chairman Andreas Artemis said: "It should be understood by everyone... especially from the 56 members of parliament... there should not be any further delay in the adoption of the eurogroup proposal to impose a levy on deposits more than 100,000 [euros] to save our banking system".

If ordinary savers are exempt, then larger investors, many of them Russian, would have to pay an even higher rate, if a levy does remain part of the scheme.

The government fears this would prompt foreign investors to withdraw their money, destroying one of the island's biggest industries.

Businesses in Cyprus have been insisting on payment in cash, rejecting card and cheque transactions.

"We have pressure from our suppliers who want only cash," said Demos Strouthos, manager of a restaurant in central Nicosia.

Our correspondent says he has never seen this much pressure being applied to a member state by the rest of the eurozone community in recent years.

Eurozone partners are saying Cyprus has got to change its banking system, which is over-reliant on foreign depositors, and the money it needs has to come out of that system, one way or another, he adds.

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