Exclusive - Euro zone call notes reveal extent of alarm over Cyprus

BRUSSELS Thu Mar 21, 2013 8:18am EDT

People queue up to make a transaction at an ATM outside a branch of Laiki Bank in Nicosia March 21, 2013. REUTERS/Yorgos Karahalis

People queue up to make a transaction at an ATM outside a branch of Laiki Bank in Nicosia March 21, 2013.

Credit: Reuters/Yorgos Karahalis

BRUSSELS (Reuters) - Euro zone finance officials acknowledged being "in a mess" over Cyprus during a conference call on Wednesday and discussed imposing capital controls to insulate the region from a possible collapse of the Cypriot economy.

In detailed notes of the call seen by Reuters, one official described emotions as running "very high", making it difficult to come up with rational solutions, and referred to "open talk in regards of (Cyprus) leaving the euro zone".

The call was among members of the Eurogroup Working Group, which consists of deputy finance ministers or senior treasury officials from the 17 euro zone countries as well as representatives from the European Central Bank and the European Commission. The group is chaired by Austria's Thomas Wieser.

Cyprus decided not to take part in the call, a decision that several participants described as troubling and reflecting the wider confusion surrounding the island's predicament.

"The (Cypriot) parliament is obviously too emotional and will not decide on anything, if Cyprus does not even feel that they can attend the call it is a big problem for us," the French representative said, according to the notes seen by Reuters.

"We have never seen this."

The German representative raised the need to learn more about capital outflows from Cyprus to Russia and Britain, and emphasised that "we stand ready to find a solution immediately" as long as the parameters of the bailout agreed among euro zone finance ministers on Saturday are respected.

The official also referred to the need to resolve the issue of Cyprus's two biggest banks, both of which are close to collapse, and mentioned the possibility of Cyprus leaving the euro zone.

In the event of an exit, the official said steps needed to be taken to "ring-fence" the rest of the euro zone from the impact and to ensure there was no contagion to Greece.

One issue repeatedly raised on the call was the risk of large outflows of capital once Cypriot banks reopen, probably on Tuesday. The ECB representative said the situation was being closely monitored and "technical preparations" were being made to try to limit the amount of any outflow.

"Some additional laws need to be passed. Overall we are in a very difficult situation," the official said, according to the notes. "(We're) trying to do everything within the powers to limit any unauthorised outflows."

Cyprus's finance minister continued discussions in Moscow on Thursday to see whether a way can be found to involve Russia in the bailout so that large depositors in Cypriot banks, many of whom are Russian, are not hit with a one-off levy.

Financial markets have largely taken the problems in Cyprus in their stride, perhaps calculating that any collapse of an economy worth only around 17 billion euros, will have only a limited impact, or that a solution will be found in the end.

"Markets believe that we will find a solution and that we will provide more money and this might not be the case," one of the participants on the call said, according to the notes.

In wrapping up the teleconference, the chairman described the situation as "foggy" and expressed concern about Cyprus's decision not to take part in the call.

"The economy is going to tank in Cyprus no matter what," the notes quoted him as saying. "Restrictions on capital will probably be imposed," he said, adding that further conference calls would be organised in the coming days.

(Writing by Luke Baker, editing by Mike Peacock)

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Comments (10)
1st4fairness wrote:
For how many more years will the rest of the World have to put up with Euro crises as 20 odd euro nations take it in turn to find something to bicker about? The Euro will die, the only questions are when and after how much cost?

Mar 21, 2013 7:37am EDT  --  Report as abuse
Stu255 wrote:
Whose idea was it to throw depositors under the bus ahead of bondholders?

Because that single decision has destroyed the structure of debt seniority in the eurozone.

How can deposits carry more risk than bonds??

If I lived in Cyprus then the minute the banks open I would withdraw all of my deposits and purchase corporate bonds instead.

They are more protected by the EU and they pay a much higher yield.

Why on earth would anyone living inside the eurozone deposit money in a bank after this debacle? I certainly wouldn’t, people should buy bonds in the bank instead, because we now know that the EU (against all the rules of seniority) will expose depositors ahead of bondholders.

Every billionaire and multinational corporation shares this understanding of the system. Which means the EU banking system is finished.

Mar 21, 2013 8:29am EDT  --  Report as abuse
robinson99 wrote:
Cyprus should go ahead with the bank levy, but give a pro-rata share in future gas reserves to all depositors who have lost money through this tax. Like this they will secure a European/IMF bailout now and won’t have to sell their gas reserves at below par to the Russians. The deposit holders will be grateful something is coming to them. If Cyprus goes bust the deposit holders will lose a lot more. Like this Cyprus has a chance of preserving their banking industry. A simple solution. QED

Mar 21, 2013 10:13am EDT  --  Report as abuse
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