* No bailout for Cyprus would mean bank resolution, wiping
* Financial sector meltdown in Cyprus could force it out of
* Nationalising pension fund combined with levy on big
deposits could be solution
By Jan Strupczewski and Luke Baker
BRUSSELS, March 21 If Cyprus cannot agree on a
levy on deposits it faces having its biggest banks wound down,
which would wipe out uninsured depositors, or could be forced to
leave the euro zone, a senior European Union official said on
"At the end of the day it is their own choice," said the
official, who has direct knowledge of the negotiations between
the euro zone, the International Monetary Fund and Cyprus.
"We can do a lot to avoid such fundamental damage that they
would have to leave the euro, we and especially the ECB, but if
they do not cooperate, they will simply run out of cash and then
they would have no other choice but to start printing their own
currency," the official said.
The European Central Bank has given Cyprus until Monday to
agree on an international bailout or face losing emergency funds
for its banks, a move that would almost inevitably lead to the
collapse of at least the two largest banks.
"If the financial sector collapses, then they simply have to
face a very significant devaluation and faced with that
situation, they would have no other way but to start having
their own currency," the official said.
Cyprus, which is cut off from market financing, needs around
17 billion euros in funding, but its parliament this week
rejected a bailout because it entailed raising 5.8 billion euros
through a one-off levy on deposits.
The levy proposed by euro zone finance ministers and the
International Monetary Fund was 6.75 percent on deposits below
100,000 euros and 9.9 percent above that threshhold. In theory,
euro zone deposits up to 100,000 euros are guaranteed.
Cyprus, where many rich Russians keep money, has rejected
the idea of taxing deposits above 100,000, a move President
Vladimir Putin called "unfair, unprofessional and dangerous."
NO BAILOUT MEANS WINDING DOWN CYPRIOT BANKS
There is now a stalemate in efforts to get emergency funding
for the island, which asked for financial help last June after
its banking sector was hit by a Greece's debt restructuring.
Cypriot banks have been shut since Friday and are not
expected to open again until Tuesday. If no deal can be reached
before Tuesday, there is a risk of a massive withdrawal of funds
from Cypriot banks, which could collapse the economy.
The senior euro zone official said the alternative to the
proposed levies would be much worse for depositors, with the
risk that 30-40 percent of all funds above 100,000 euros would
be wiped out, and potentially more than that, especially in the
two largest banks, Cyprus Popular Bank and Bank of Cyprus.
The ECB on Thursday gave Cyprus until Monday to find a
solution, otherwise it will withdraw emergency assistance to
Cyprus, pulling the rug from under the lenders.
"It is difficult to say what would be the exact consequences
of resolving the banks but the vast majority of unsecured
deposits would be wiped out," the official said.
To handle winding down banks in an orderly way, Cyprus needs
to pass legislation on bank resolution, which is ready in draft
form. But Cypriot parliamentarians do not want to vote on it yet
so as not to make the bank resolution scenario easier.
"They don't want to pass that, because it is a bargaining
chip from their point of view. They think they can threaten the
euro zone with this, but they are overplaying their hand," the
A law on capital controls, to prevent money flowing out of
Cyprus once banks reopen for business on Tuesday, will, however,
be passed, the official said.
PENSION FUND NATIONALISATION
As a way out of the fix, the Cypriot parliament could agree
to a 12-13 percent levy on deposits higher than 100,000 euros
and no tax on smaller savings, the official said. If the
island's pension funds were also nationalised, it might be
enough to square the circle and finance the bailout.
"The pension funds are cash rich, they are liquid, so you
could make a reasonable conversion of cash versus assets in the
recapitalised banks," the official said, pointing out that the
same solution was used in Portugal, which also needed euro zone
emergency funding, and to some extent in Ireland.
Such a move, which could raise around 2 billion euros, would
help protect pensioners in case of bankruptcies and the ensuing
losses suffered by depositors.
But Germany and some other euro zone countries remain
opposed to the idea, the official said.
"There are so many red lines from euro zone countries and
from the IMF that it is virtually impossible to have any common
territory for the moment," the official said. "There is no
flexibility from anybody."
"The German hardliners should start contemplating the
pension fund option and the Cypriots have to realize that they
have to tax the higher deposits, maybe with a higher rate than
10 percent," the official said.
"The alternative is that all uninsured depositors would lose
30-40 percent in the best scenario of a bail-in."
Cyprus is also seeking five billion euros in a new loan from
Russia, on top of a request to extend by five years a 2.5
billion euro loan maturing in 2016.
The official said that while the Russian government has
signalled it would not lend new money to Nicosia, Cypriot
Finance Minister Michael Sarris, now in Moscow, could be trying
to secure new funding from Russian banks or state-owned firms.
Cyprus also has potentially large gas deposits that it could
start exploiting from 2018 and is considering scrutinising
future revenues from gas to raise money now. The euro zone
official said Russia was unlikely to be interested, however.