Cyprus Scrambles For Financing as Deadline Looms

imageNicosia, Cyprus

Cypriot President Anastasiades continues to seek a new finance plan for Cyprus on Thursday after the Cypriot parliament unanimously rejected the EU-trokia deposit tax earlier on Tuesday.

The Cypriot government is currently weighing two competing finance plans from the EU and Russia that carries serious economic consequences for Cyprus along with geo-political ripple-effects that could impact the entire region.

Representative from the troika which includes the International Monetary Fund, the European Central Bank, and the European Commission were in Nicosia on Wednesday to meet with Cypriot policymakers.

The ECB reported on Thursday that it is willing to provide liquidity to Cyprus at the current level until Monday March 25th.

Meanwhile, lawmakers in Nicosia are still scrambling to craft a Plan B that may include a revision to the EU bank depositor tax that hits large investors rather than small savers, among other proposals.

According to Reuters,”Officials said new options discussed on Thursday could include nationalizing pension funds of semi-government corporations, issuing an emergency bond linked to future natural gas revenue or a revised bank deposit levy hitting only large investors.”

Many of the largest bank depositors in Cyprus are wealthy Russians, including some Russian oligarchs who have poured billions into Cypriot banks and economy, seeking tax relief, high returns, and easy transfer of wealth.

Ksenia Galouchko, a reporter from Bloomberg News, acknowledged this morning on Bloomberg’s On the Move that Russia is the biggest investor in Cyprus.

“There is a lot of Russian money in Cyprus, both from banks, Russian companies, people transferring money through Cyprus, and keeping money on deposits there because of the dual-tax treaty and because there are low taxes in Cyprus” Galouchko said.

Since Russians have benefited the most from Cyprus loose tax laws, they may end up paying the most for a revised depositors tax if Plan B is approved that targets large investors instead of small savers.

Russian leaders, including President Vladimir V. Putin and Prime Minister Dmitry Medvedev, have both expressed their strong disapproval of the deposit tax in the original bailout proposal.

“So far actions of the European Union, the European Commission together with the Cypriot government regretfully resemble a bull in a china shop to me,” Medvedev said during an interview with Interfax and European media.

Cypriot Finance Minister Michael Sarris remains in Russia asking for a further €5.8 billion in financial aid required by the EU under a € 10 billion ($13 billion) bailout rescue plan.

As Cyprus’ economy is slowing down, the country’s bank accounts remain frozen, and Cypriots are left feeling unfairly targeted by the newly defeated Troika-EU plan that would have instantly taken money out of their bank deposits to pay for the banks’ past failures.

The central bank in Cyprus recently announced that banks in Cyprus will not re-open until at least Tuesday as the Cypriot government scrambles to develop Plan B.

Meanwhile, Europeans in Northern Europe don’t want to pay for a Cyprus bailout rescue plan for a country on the periphery of Europe that has high debts, a failed banking system, and an economy that has become too lax and reliant on Russian money for preservation.

Unlike the other countries in the Euro area that have reluctantly embraced austerity measures (E.G. Ireland, Portugal, Greece, and Spain), Cyprus has still not been backed into the austerity corner by Brussels and yet ECB liquidity continues to flow to the country.

Cypriot lawmakers cling to the hope that they can receive large revenues from undeveloped offshore natural gas fields in waters that are currently disputed with Turkey.

However, future natural gas revenues are still years away from monetization and may not be the best hand for Nicosia to play right now as they seek to negotiate a new finance plan under a looming deadline.

 

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