Cypriot government, eurozone leaders, Russians all have skin in the game

FRANKFURT – The government of Cyprus is trying frantically to come up with a Plan B to avoid the country’s financial collapse and possible exit from the euro currency union.

Plan A was shot down by the parliament, which was outraged over a proposal to raid up to 10 per cent of all bank deposits. The seizures were meant to raise 5.8 billion euros ($7.5 billion) in order to qualify for 10 billion euros ($12.9 billion) in rescue loans from international creditors.

The new plan taking shape involves restructuring of one of the country’s biggest banks and possibly dipping into the pension funds.

At this point, there’s not a lot of time. The European Central Bank has taken a hard line, saying it will pull the plug Monday on emergency credit being supplied to Cyprus’ banks. If that happens, the banks will collapse, fueling financial chaos and possibly forcing Cyprus out of the euro currency union. It’s not clear if Cyprus’ Plan B will win approval for loans from the other euro member governments.

Here are the main players in Cyprus’ drama and what they have at stake:

CYPRUS — The tiny Mediterranean island country has attracted foreign depositors, many of them Russians, by offering high interest rates, low corporate taxes and a way to protect assets against the rampant corruption back home. That has swollen banks’ deposits to 68 billion euros ($88 billion), four times the size of the Cypriot economy.

The banking sector fueled the country’s economy, employing people in financial services and spilling over into real estate and tourism. The country’s banks ran into trouble because they invested billions in Greek government bonds, which suffered huge losses when that government defaulted last year. Now Cyprus is unable to borrow from bond markets, and it has a 1.4 billion bond repayment due in June that it can’t cover.

To bail out its banks and keep the government going, Cyprus needs around 17 billion euros ($22 billion), fast. The 16 other eurozone countries and the International Monetary Fund are willing to lend 10 billion euros.

But Cyprus has to cough up the rest itself, and in cash.

Taking money from depositors is one option. Another is by restructuring the worst hit banks by insulating their soured investments into a so-called ‘bad bank.’ That would allow the good part of the bank to survive and reduce the amount of money the government needs to rescue it.

A euro exit would likely cause extreme financial chaos, as people try to get their money out of the country before all their holdings are changed into a new, weaker currency.

Experts say it’s hard to craft a deal for Cyprus without taking depositors’ money. But stinging depositors could end the country’s business model as a haven for wealthy foreigners.

If Cyprus doesn’t find the money, it might have to drop out of the euro to print the money it needs to shore up its banks.

EUROZONE PARTNERS — They want a bailout to prevent a tiny country with only 0.2 per cent of the eurozone’s economy from leaving the euro. An exit from the currency bloc, even by the smallest country, could have unpredictable consequences. If investors fear other countries might leave, those countries would have trouble borrowing money in financial markets and people could rush to pull their money out of the banks.

The eurozone countries say tapping deposits is the only practical way to solve its crisis. They say it’s OK if deposits below 100,000 euros remain untouched because that is the sum covered by national deposit insurance.

One big reason the eurozone countries are limiting their aid offer is that the rescue loans they hand out are guaranteed by their own taxpayers.

Did anyone mention it’s an election year in Germany? As the eurozone’s largest economy, it is the biggest guarantor of any bailout. Cyprus would be the fifth country bailed out since Europe’s financial crisis erupted 3 1/2 years ago.

The feeling among lawmakers, who would have to approve any deal, is that bailing out Cyprus to keep it in the eurozone would be a necessary evil — better than a euro exit.

But using taxpayer euros to spare the deposits of Russian businessmen who stash their loot in Cyprus? No.

THE EUROPEAN CENTRAL BANK — The ECB has been letting the Cypriot central bank keep the country’s two biggest lenders afloat through some 9 billion euros emergency loans. Problem is, the ECB’s rules forbid lending to insolvent banks — and with no bailout the banks are obviously broke.

So the ECB has said it will force the Cypriot central bank to turn off the money tap on Monday if there’s no deal.

RUSSIA — Cyprus is a favourite destination for Russians looking for a safe place to keep assets. Some 37 per cent of deposits in Cyprus are held by foreigners — and that may be understating it, since some foreign depositors and companies may have set up in Cyprus itself.

The idea that wealthy Russians would lose a chunk of their money through a deposit confiscation or bank collapse was criticized by President Vladimir Putin. Russia has already loaned 2.5 billion euros ($3.2 billion) to Cyprus to help with its finances.

But Russia isn’t rushing to offer more financial aid despite a frantic visit there by the Cypriot finance minister. And eurozone officials are warning: no more loans beyond the 10 billion euros ($12.9 billion). Going beyond that would saddle the country with debt of up to 145 per cent of GDP, more than the lenders think the country could repay.

The Russians and their giant, state-connected gas company, Gazprom, might have interest in a lease on offshore gas deposits near Cyprus. There’s also been vague talk of possibly installing a Russian military base.

At what price, though, is the question.