EU gives Cyprus bailout ultimatum, risks euro exit

NICOSIA,  (Reuters) – The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In a sign it was at least preparing for the worst, the Cypriot government sought powers yesterday to impose capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen following this week’s shutdown.

In stark warnings earlier in the day, the European Central Bank said it would cut off liquidity to Cypriot banks and a senior EU official made clear to Reuters that the bloc was ready to see the bankrupt island banished from the euro in the belief it could then contain damage to the wider European economy.

The ECB ultimatum came as the island’s leaders struggled to craft a “Plan B” to raise the 5.8-billion euro contribution demanded by the EU in return for a 10-billion euro ($13-billion) bailout from the EU and IMF; angry Cypriot lawmakers threw out a tax on deposits, calling the EU-backed proposal “bank robbery”.

In a mark of strained relations and confusion, euro zone officials conceded on a Wednesday conference call that Cyprus refused to join that the situation was “in a mess”.

After more talks last evening, the currency union’s finance ministers urged Cyprus to table a new proposal that would, Dutch chairman Joreon Dijsselbloem said, respect “the parameters defined earlier”.

As parliament convened late in the day, the government submitted a bill seeking the power to impose capital controls on banks, a type of measure unseen since before the country joined the single currency bloc five years ago.

It also proposed a “solidarity fund” that would bundle state assets, including future gas revenues, as the basis for an emergency bond issue, likened in a note by JP Morgan to “a national fire sale”.

The speaker of parliament, Yiannakis Omirou, insisted a revised levy on uninsured bank deposits was not on the table.

ECB PATIENCE FLAGS
The European Central Bank, which has kept Cyprus’s banks operating with a liquidity lifeline, said the government had until Monday to get a deal in place, or funds would be cut off.

“Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks,” the ECB said.

In Brussels, a senior European Union official told Reuters that an ECB withdrawal would mean Cyprus’s biggest banks being wound up, wiping out the large deposits it has sought to protect, and probably forcing the country to abandon the euro.