Cyprus Banking Crisis: The Endgame Begins

The ultimatum has been issued: The European Union is pressuring Cyprus to end its standoff over a proposed financial rescue package and agree to new terms very rapidly – or face bankruptcy. Cyprus is scrambling to respond with a revised plan that would shield small depositors, but it still needs to finalize details, and then win approval from the E.U. Two days after the Cyprus parliament overwhelmingly rejected the bailout, which would have taxed the deposits of all bank account holders, the E.U. hit the island with a one-two punch. The first blow was a brief, two-line announcement from the European Central Bank (ECB) that it would stop providing emergency liquidity assistance to Cypriot banks on Monday, March 25, unless the island nation agrees to a bailout deal with the E.U. and the International Monetary Fund before then. The announcement was a blunt attempt to force Cyprus’ hand, mainly because the tiny nation’s biggest banks have racked up heavy losses from soured loans to Greece and are dependent on liquidity from the ECB. Cutting off that financial lifeline would push them into bankruptcy, perhaps even taking the government with it, because the banks’ assets are estimated by Standard and Poor’s to be five times the size of Cyprus’s economy. “Neither the bank shareholders nor Cyprus’ government appear able on their own to meet the banks’ pressing capital needs,” S&P said in a statement announcing that it was lowering the island’s long-term credit rating to CCC from CCC+, judging the financial outlook to be “negative.” The second blow was a conference call by the so-called Eurogroup, comprised of finance officials from the 17 nations that have the euro as their currency. A statement after the call made it clear that the E.U. would not back down on its key condition for a $13 billion rescue, namely that Cyprus itself put up $7.5 billion. The Eurogroup called on the Cyprus government to put forward a new proposal “as rapidly as possible.” However, the statement made clear that the E.U. no longer was

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