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Cyprus in race against time to find new aid plan

Published: Thursday, March 21, 2013 1:00 p.m. CDT
Caption
(Petros Giannakouris)
People queue at an ATM outside a closed Laiki Bank branch in capital Nicosia, Cyprus, Thursday, March 21, 2013. The European Central Bank says it will keep emergency aid for Cyprus' troubled banks in place at least until Monday but will have to cut it off after that unless an international rescue program is drawn up. (AP Photo/Petros Giannakouris)

NICOSIA, Cyprus (AP) — As Cypriot politicians raced to find a new financial rescue plan ahead of a Monday deadline, tensions built in the streets of the capital. Residents withdrew what money they could from ATMs amid concern the banks could collapse.

The European Central Bank warned Thursday it will pull the plug on the country's troubled banks at the start of next week if a bailout package for Cyprus is not approved by then. The plan must please both Parliament and the potential rescue creditors — the other 16 countries that use the euro and the International Monetary Fund.

Amid indications that the new plan will include restructuring Cyprus' troubled second-largest lender, Laiki, long lines of people formed at the bank's ATMs in the capital.

"We need cash. We have families, children, grandchildren and expenses, and the banks have been closed since Saturday," said Andri Olympiou in Nicosia, the capital.

Banks have been shut since an initial bailout plan last weekend proposed raiding bank deposits, raising howls of outrage. They will remain closed until Tuesday to prevent a run. Although ATMs have been functioning, many often run out of cash.

"I've been to five ATMs, looking for the one with the smallest queue. The others had really long queues, at least 40 or 50 people," said Peter Larkin, a Nicosia resident waiting in line with his 5-year-old daughter. "There's a lot of rumours that Laiki is going to go bankrupt and that (their ATMs) will stop giving out money."

Bank employees protested outside Parliament, chanting "Cypriots wake up! We're not selling Cyprus!" Riot police stood guard and the main road was blocked to traffic.

Leaders of Cyprus' political parties met with the president to consider a range of measures that could raise the 5.8 billion euros ($7.5 billion) needed to qualify for 10 billion euros ($12.9 billion) in rescue loans from the eurozone partners and the IMF.

The "Plan B" will likely include restructuring Cyprus' troubled banks, some form of Russian help, dipping into pension funds and taking up an offer from Cyprus' wealthy Orthodox church to contribute. Some form of tax on bank deposits is also possible.

One new development Thursday was the government's announcement of its intention to create a so-called "Investment Solidarity Fund."

The fund is intended to appeal to "the patriotism of Cypriots" and draw on contributions from ordinary Cypriots, businessmen and foreign investors, said Demetris Syllouris, head of a small right-wing party who was in a meeting with the president where the "Plan B" was being hashed out.

The legal and technical details were still being worked out, and the bill to set up the fund would be reviewed by the Cabinet later Thursday before being sent to Parliament for a vote, government spokesman Christos Stylianides said. As there was unanimous agreement by party leaders to set up the fund, it was likely the bill would pass.

Eurozone finance ministers will hold a phone conference later Thursday to discuss the situation.

A "Plan B" is needed after lawmakers soundly defeated the earlier proposal to seize up to 10 percent of all domestic deposits to raise the 5.8 billion euros.

"We will have a program of support for Cyprus by Monday," central bank governor Panicos Demetriades said.

One major lender, Bank of Cyprus, appealed to the government and politicians to reach a plan that the eurozone partners would accept, clearing the way for the bailout.

"The Cypriot economy is in a marginal and fragile state. The next move could prove salutary or disastrous," the bank said in a statement. "It is imperative we immediately proceed with the drawing up of an agreement with the Eurogroup."

It seemed unlikely an overall plan would be reached in time for a vote Thursday.

"Today, no, I don't think so," said Averof Neophytou, deputy head of the governing DISY party, when asked if a deal could be reached and voted on by the evening.

Russia is likely to pitch in, though its contribution will be smaller than originally hoped for, Cypriot officials have said. Nearly a third of the 68 billion euros ($88 billion) in deposits in Cyprus' oversized banking sector are held by Russians.

Cyprus' finance minister, Michalis Sarris, has been in Moscow since Tuesday seeking to forge a deal.

Russia's help would not be a loan, but rather some form of an investment, Sarris told Cypriot state broadcaster CyBC on Thursday. He is due to meet with his Russian counterpart, Anton Siluanov, and the Russian energy minister later in the day.

Russia news agency ITAR-Tass quoted him as saying "we are discussing the subjects of gas, bank cooperation and other subjects." Cyprus has recently discovered significant off-shore gas deposits, and major energy companies have shown an interest in tapping those resources.

The European Central Bank has said it will switch off its lifeline to the Cypriot banks on Monday unless a bailout deal is in place. The ECB is keeping the Cypriot banks alive by allowing them to draw on emergency support from the local central bank.

In Brussels, the head of the 17-nation eurozone's finance ministers Jeroen Dijsselbloem, said the ECB was doing "as much as they can within their mandate."

He also said that a one-time tax on bank deposits was "inevitable" given Cyprus' oversize financial sector, but said the burden should be shifted toward taxing big bank deposits of more than 100,000 euros.

An amended bill that would have exempted deposits of under 20,000 euros in the bank was turned down by lawmakers Tuesday.

____

Petros Giannakouris in Nicosia, Juergen Baetz in Brussels, David McHugh in Frankfurt and Jim Heintz in Moscow contributed to this report.

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