22 March 2013: ECB gives Cyprus bailout ultimatum

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The Cyprus drama escalated with furious banking employees protesting in front of Parliament as worries about the effect of the Cyprus-crisis on the euro zone intensified. Shares in Europe fall yesterday as did USD/EURO. The Euro is under continued downward pressure. The European Central Bank (ECB) simultaneously issued a bailout ultimatum that liquidity transfers to the Central Bank of Cyprus would be stopped on Monday unless Cyprus agreed on terms and conditions for a bailout.

In a bid to raise investments in a Solidarity Fund to raise the required Euro 5,8 billion that is necessary to unlock the EU/IMF’s Euro 10 billion financial assistance package for Cyprus, the Government yesterday succeeded in mobilizing support from all the political parties. The powerful and economically strong Greek Orthodox Church has also stated its willingness to contribute with cash injections and land assets. The Fund would be built up on possible future income from the oil and gas reserves on the continental shelf.

Any effort to speed up offshore natural gas exploration as a way of attracting desperately needed investment to save its teetering economy, might, however, be challenged by Turkey which questions Cyprus sovereign rights to explore and exploit what Turkey regards as disputed areas. According to the International Law of the Sea Convention agreement between the concerned parties is a prerequisite for starting drilling activities in disputed areas. A possible Turkish challenge gives an added dimension to the crisis as a stark reminder of the Turkish invasion of Cyprus in 1974.

Potential gas riches also seem to have been part of the negotiations the Minister of finance, Michael Sarris, is conducting in Moscow. The gas resources have been identified as one area where Russia might be interested in investing. A lot of rumors are surrounding these negotiations which so far has reached no breakthrough. Yesterday it was claimed that the second biggest bank, Popular Bank of Cyprus, was bankrupt, and that Gazprombank the financial arm of Gazprom, the world’s biggest gas company was ready to take over in a trade off with access to blocks on the shelf. That was denied by Gazprombank. It is, however, a fact that both Popular and the Bank of Cyprus are closed to bankruptcy.

Rumors were also spread that Cyprus has given Russia rights to establish a naval base in Mari. Russia might in connection with informal talks on the side line of the official negotiations, sounded out the opportunity to establish repair facilities for its merchant fleet in Cyprus. Similar sounding outs have been given to Greek islands. Nothing has yet been finally settled. Russia might be willing to extend the Euro 2,5 billion credit given to Cyprus for 5 years at 4,5% interest rate for 5 more years.

It is nevertheless worth reminding that England has had two military bases on the island since Cyprus gained its independence in 1960. There are also bases on the Turkish occupied northern part of Cyprus. On that basis a Russian naval base seems rather unlikely.

A delegation from the EU-commission headed by the President, Manuel Barroso, met yesterday with Prime Minister Dmitry Medvedev. Before the meeting Medvedev lambasted the EU’s handling of the Cyprus debt crisis comparing the “levy” with Soviet style confiscations. The fact that EU and the newly elected Cyprus president, Nikos Anastasiades, left Moscow, one of the most concerned parties, out in the dark regarding the bailout created outrage.

Officials in Moscow were privately skeptical to a Russian bailout or in Russia’s interest to provide further bridging loans. Commercial criteria would be the basis for any possible investments. This was clearly expressed by one Russian banker: “Buying worthless equity in a bank for a million or two. That is not going to bear very far here in Moscow”.

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