BERLIN — Cypriot leaders began scrambling Thursday to put together a plan to restructure its broken banking system after Europe’s central bank gave the country until Monday to reach a bailout deal to save it from financial disaster and from possibly being forced to leave the euro currency zone.
The stark ultimatum came in a terse statement from the European Central Bank’s governing board that on Monday it would cut off the flow of euros to Cyprus’s financial system unless the country’s leaders reach terms with the International Monetary Fund and other European nations on an international bailout.
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The IMF and other euro zone countries have offered to lend Cyprus around$13 billion, but expect the country to come up with $7.5 billion on its own through taxes, government spending cuts or other measures to help restart a banking system that is essentially broke. A plan to raise the money by taxing bank deposits — including tens of billions of dollars held by Russians and other foreigners -- collapsed earlier this week in the Cypriot parliament.
The Associated Press reported that party leaders and the Cypriot government were hashing out three new laws on Thursday night, ranging from restricting bank transactions to restructuring the most troubled bank, Cyprus Popular Bank, or Laiki.
According to AP, central bank governor Panicos Demetriades, urged lawmakers to vote immediately on a legal framework bill to rehabilitate Cyprus’s banking sector. The bills include restructuring Laiki so that Cyprus would be able to guarantee all deposits up to $130,000 — the European Union’s limit for bank guarantees.
The government will also create an “Investment Solidarity Fund,” which is intended to appeal to “the patriotism of Cypriots” and draw on contributions from ordinary Cypriots, businessmen and foreign investors, AP reported.
“We will have a program of support for Cyprus by Monday,” Demetriades said earlier in the day, according to the wire service.
Because Cyprus is small and its banks aren’t so wired into the international system, a failure likely wouldn’t trigger the kinds of global problems feared if Greece or another euro nation were to leave the currency union. Still, the uncertain fallout from a Cyprus exit fueled an intense hunt for options — from a nationwide bank restructuring that would put the largest Cypriot banks out of business, to more unusual proposals like mortgaging the property of the Orthodox Church, selling off natural gas rights, or simply asking for donations.
Those details, however, were overshadowed by the larger issues — of a developed world central bank flexing its muscle over a nation’s leaders and of the possibility that the euro zone, after years of insisting otherwise, may finally have to admit that its membership is not sacrosanct.
Central banks in the developed world have taken on outsize influence since the collapse of Lehman Bros. in 2008. The U.S. Federal Reserve has made massive asset purchases and recently established a target unemployment rate, and the Bank of Japan has committed to engineering higher prices to “reflate” the country’s economy.
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