Cyprus crisis goes down to the wire

Leaders scramble to rescue bailout deal as cut-off deadline for emergency bank funding looms.

NICOSIA // Cyprus was locked in frantic negotiations with international lenders yesterday to avert a financial collapse that could reverberate across the euro zone.

The finance minister Michael Sarris said "significant progress" had been made in talks with officials from the European Union, the European Central Bank and the International Monetary Fund. The EU's 17 finance ministers meet today in Brussels.

Mr Sarris said Cyprus was considering a levy of about 25 per cent on deposits over €100,000 (Dh477,000) at the Bank of Cyprus. Without a deal by tomorrow, the ECB has threatened to cut off emergency funds, which would devastate the island's banks and economy and affect the euro currency union itself.

In a late-night session on Friday, parliament endorsed several key measures needed to raise the €5.8 billion that international creditors have set as a condition for a €10bn bailout.

But MPs held off debating the most important and contentious issue - levying a hefty tax on bank deposits of more than €100,000, a move that would upset Moscow, a close ally.

Cyprus's tottering banks hold €68bn in deposits, including €38bn in accounts of more than €100,000, much of it belonging to Russian investors, and Cypriot leaders fear that hitting them could badly damage the island's status as a low-tax offshore banking centre.

On Tuesday, MPs overwhelmingly rejected an unpopular initial plan that would have slapped a one-off tax on all bank accounts with more than €20,000.

But under pressure from its euro-zone partners, parliament has signalled it is willing to tax bigger savers. That would spare most Cypriot depositors at the expense of foreign investors.

At home, there were impassioned pleas from veteran politicians, state officials and newspapers for MPs to stop any "defiant posturing" and save Cyprus from bankruptcy.

On Friday night, Cypriot MPs took other measures to ease pressure from Brussels, such as approving legislation to create a national solidarity fund. This would include returns from as yet untapped offshore gasfields, nationalising pension funds of semistate companies and collecting revenues from the sale of assets belonging to Cyprus's wealthy Orthodox church.

Also passed was a bill to restructure the island's second-biggest and most troubled bank, Laiki, which would account for €2.3bn towards Cyprus's contribution to its rescue plan.

And the Cypriot parliament approved capital controls to prevent a run on the banks when they reopen on Tuesday after more than a week.

Cyprus's options dramatically narrowed on Friday when, to Nicosia's dismay, Russia made clear it was not prepared to offer an economic lifeline.

Increasing euro-zone pressure on Cyprus has been led by Germany, whose chancellor, Angela Merkel, has said the Mediterranean island's business model is obsolete. Cypriots pride themselves on being hard-working, resilient and resourceful. They bristle at what they see as a German perception that Cypriots have been living beyond their means and on inflated dreams.

Anti-German rhetoric on the streets of Cyprus is as strident as it is in Greece.

"The Germans didn't manage to conquer the world with guns but they're trying to do it now through financial measures," said Andreas Christodoulides, a 60-year-old businessman in Nicosia. "For the first time they demanded a tax on the bank accounts of an EU member. But we refuse to be guinea pigs for this experiment."

His small but thriving business, which imports clothes, shoes and accessories, is feeling the pinch. "Business is at a standstill. Because the banks are shut, we can't pay for our supplies and we can't receive money from our customers."

German politicians have alleged that Russian oligarchs have ill-gotten billions invested in Cyprus, while angry Cypriots counter their banking system is clean.

Many claim that the real aim of Germany is to seize a large share of the Russian business pie from Cyprus.

"We're caught between Moscow and Berlin," said Evgenia Hadjigeorgiou, a 27-year-old bank employee protesting outside parliament on Friday night.

Hubert Faustmann, an analyst at the University of Nicosia, said: "Cypriots see neo-colonialism creeping in through the financial back door."