Published March 22, 2013
FRANKFURT, Germany – 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 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.
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. It's not clear if Cyprus' plan B will win approval for loans from the other eurozone governments.
Here are the main players in Cyprus' drama and what they have at stake:
CYPRUS — The Mediterranean island country attracted foreign depositors, many Russians, by offering high interest rates and low taxes. That has swollen banks' deposits to 68 billion euros ($88 billion), four times the size of the Cypriot economy.
The banks then invested heavily in Greek government bonds — and suffered huge losses when Athens defaulted last year. Now both the banks and the government, which has been shut out of bond markets, need rescuing.
The 16 other eurozone countries and the International Monetary Fund are unwilling to give Cyprus more than 10 billion euros because they fear the country would be unable to repay a debt that is any bigger.
So Cyprus has to cough up the rest, in cash.
If Cyprus doesn't find the money, the ECB says it will end emergency support for the banks, which would then collapse. The government would run out of money and need to drop out of the euro to print the money it needs. 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 the big depositors could end the country's business model as a safe haven for wealthy foreigners — mainly Russians — to put their money. The money spills over to the economy in the financial services, tourism and real estate sectors.
That business model may be finished anyway, after all this.
EUROZONE PARTNERS — They want a bailout to prevent a tiny country with only 0.2 percent 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 would rush to pull their money out of the banks.
One big reason the eurozone countries are limiting their aid offer and pressing for deposit seizures is that the rescue loans they hand out are guaranteed by their own taxpayers.
Did anyone mention it's an election year in Germany?
The feeling among German 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 German taxpayer euros to spare the deposits of Russian businessmen who stashing 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 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 favorite destination for Russians looking for a safe place to keep assets. Some 37 percent of deposits 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 did not go down well in Moscow. Russia has already loaned 2.5 billion euros ($3.2 billion) to Cyprus.
But Moscow isn't rushing to offer more help despite a frantic visit there by the Cypriot finance minister. And eurozone officials are warning: more loans beyond the 10 billion euros ($12.9 billion) aren't the answer, that's too much debt.
The Russians and their giant, state-connected gas company, Gazprom, might have interest in getting their hands on gas deposits near Cyprus. There's also been vague talk of possibly installing a Russian military base.
At what price, though, is the question.