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Cyprus faces ECB bailout deadline

People wait to use the ATM of a closed branch of Laiki Bank in the southern port city of Limassol.

The European Central Bank said it may cut Cypriot banks off from emergency funds after March 25 as the island nation’s president, Nicos Anastasiades, pursued options at home and in Russia to stave off financial collapse.

The ECB’s Governing Council said Thursday that so-called emergency liquidity assistance, or ELA, “could only be considered” after Monday if an aid program from the euro area and International Monetary Fund “that would ensure the solvency of the concerned banks” is in place, the central bank said Thursday in a statement.

In Nicosia, the Cabinet was to meet at 6 p.m. Thursday to discuss a proposed “investment solidarity fund,” according to a statement. The fund is intended to help raise the 5.8 billion euros ($7.5 billion) needed to trigger emergency loans, Athens News Agency reported. Finance Minister Michael Sarris said in Moscow that while Russia won’t lend money to Cyprus, it’s looking at investment in the energy industry.

Cyprus in June became the fifth euro-area nation to request a rescue after Greece’s debt restructuring, the largest in history, trashed the financial health of lenders.

“With this statement, the ECB put even more pressure on European finance ministers and the Cypriot government to come up with a deal,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “But we’ll have to see whether they’ll actually follow through with their threat if there’s no deal by Monday and policymakers decide to further extend the bank holiday.”

Dutch Finance Minister Jeroen Dijsselbloem, who leads meetings of euro-area finance chiefs, said he didn’t think the ECB was threatening Cyprus.

“That just stresses the point of the urgency, first of all on the Cypriot government,” he told European Union lawmakers in Brussels Thursday. “We need to reach agreement on a program very, very soon. I think the ECB has a valid point there.”

Euro-area finance ministers on March 16 agreed to an unprecedented tax on Cypriot bank deposits as officials unveiled a 10 billion euro rescue plan for the country. The government amended an initial proposal to exempt deposits of up to 20,000 euros, but failed to win support in parliament as popular dissent mounted.

Russian Prime Minister Dmitry Medvedev said Thursday Cyprus had “definitively rejected” the deposit levy.

The proposed investment fund would reduce the amount that Cyprus needs to raise from the bank-account tax, ANA reported, without saying where it got the information. It would include bond issuance and future revenue from gas deposits, the Greek state-run news agency said. The Cypriot central bank may contribute 560 million euros using gold reserves, ANA said.

Cyprus central bank chief Panicos Demetriades said in comments broadcast on state-run CYBC TV Thursday that he expected a bailout program to be approved by the ECB deadline.

If political leaders in Cyprus reach an agreement on a new proposal, a bill could be submitted to parliament Thursday, CYBC reported, without saying how it got the information.

“The government of Cyprus needs to decide what it wants,” French Finance Minister Pierre Moscovici said Thursday on RMC radio. “It needs to make a choice both for Europe and for its people to find a solution that is durable and fair.”

The Cypriot central bank has ordered lenders to remain closed through tomorrow. With a national holiday on March 25, account-holders therefore won’t have full access to their money before Tuesday.

In Moscow, Sarris said Cyprus was “asking for help clearly, but something that would make also economic sense for Russia,” including the extension of 2.5 billion euro loan granted by Russia in December 2011.

Three Russian officials said Cyprus was also asking for a fresh 5 billion euro loan. Sarris said on Antenna TV that Russia was unable to provide loans because of the uncertainty in Europe.

European officials have struggled to find an agreement that would rescue Cyprus, which accounts for less than half of a percent of the euro region’s economy, without unsettling investors in larger countries. Other elements of the rescue include asset sales and an increase in the corporate tax rate to 12.5 percent from 10 percent.

The proposed EU bailout of Cyprus is “absurd” and “surprising in its unpredictability and lack of consistency,” Medvedev said at a conference Thursday in Moscow.

 
A version of this article appeared in the print edition of The Daily Star on March 22, 2013, on page 6.

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