Ministers continue negotiations with EU, IMF and Russia as suspicions grow that Kremlin is pressing for stakes in gas fields
Cyprus ordered its banks to remain closed until next week as the cabinet held emergency talks on Wednesday in an effort to strike a deal with the EU or Russia to avert financial meltdown and stave off bankruptcy.
After the country’s parliament rejected a plan to provide €5.8bn (£5bn) by seizing a portion of bank deposits from anyone with a bank account, Cyprus is struggling to come up with a plan that will let it access an EU bailout to stop its banks failing.
The country’s eurozone partners and the International Monetary Fund (IMF) are ready to provide €10bn in an emergency bailout if Cyprus comes up with an extra €7bn itself. Most of the bailout money is needed to shore up the country’s oversized banking sector, with the rest for government finances.
No clear “plan B” had emerged after meetings between politicians and representatives of European partners and the IMF. The Cypriot cabinet was said to be discussing ideas including the nationalisation of pension funds of semi-government corporations, which hold €2bn-€3bn, and another form of levy on deposits. The talks were due to resume
Another option debated may have been natural gas bonds linked to hydrocarbon reserves discovered off Cyprus, which remain uncertain and will not be exported until at least 2019.
It was unclear whether European partners would accept the idea of turning to pension fund assets, which could leave the government exposed to further debts.
“We don’t have days or weeks, we have only hours to save our country,” Averof Neophytou, deputy leader of the ruling Democratic Rally party, told reporters as crisis talks in Nicosia dragged on into the evening.
Banks in Cyprus will now not open until Tuesday at the earliest, because Monday is a bank holiday. They have been shut since last week to prevent a run on deposits. The country’s two main banks – Laiki and the Bank of Cyprus – face potential failure if a bailout is not secured. One official told the Associated Press that Europe and the IMF were pressing for the two banks to be wound down. The Cypriot government was said to be considering the possibility of imposing capital controls amid fears that money would flood out of the country once its banks were reopened.
With the EU deal uncertain, Cyprus was set to launch a second day of talks with its ally Russia in Moscow on Thursday over a multibillion-dollar loan. The Cypriot finance minister, Michael Sarris, held inconclusive negotiations with Russian officials, but said he would stay in Moscow “as long as it takes” to reach a deal.
“We had a very good first meeting, very constructive, very honest discussion,” Sarris said after meeting Anton Siluanov, Russia’s finance minister. “We’ve underscored how difficult the situation is.” But he said there were “no offers, nothing concrete”.
With an estimated $31bn (£21bn) held in Cypriot banks by Russian banks, businesses and individuals, as well as up to $40bn in loans to Cyprus-registered firms, Russia has been gripped by fear since the crisis began to unfold, with state-run television transmitting rare live reports from outside the Cypriot parliament.
Yet the Kremlin’s reputation for seeking hard assets abroad in exchange for aid prompted speculation that negotiations were dragging as it bargained for stakes in offshore gas fields and Cypriot banks. Gas fields discovered in 2011 could be worth many times Cyprus’s GDP but the exact potential revenue stream is uncertain.
Much speculation has fallen on Gazprom, the state gas monopoly that has often been dubbed a tool of Kremlin foreign policy. A spokesman shrugged off speculation that it was seeking exploration rights for gas deposits in the Mediterranean. “There have been a lot of fantasies in the press,” a Gazprom spokesman, Sergei Kupriyanov, said. “We have made no proposals.” He said no Gazprom officials took part in Wednesday’s talks.
The appearance in Moscow of George Lakkotrypis, Cyprus’s minister for energy, commerce, industry and tourism, only fuelled the speculation. Cypriot officials said he was visiting a tourism exhibit.
On Wednesday, Russian prime minister Dmitry Medvedev criticised the EU’s handling of the Cyprus crisis, describing it as a “bull in a china shop” and adding that the bank deposit levy reminded him of Soviet-era policies that, he said, robbed Russians of their savings.
The Russian press reported that Gazprombank, a subsidiary of the gas group, was interested in Laiki Bank. The Cypriot government denied reports that it had been sold to foreign investors.
Charles Robertson, global chief economist at Renaissance Capital, a Russian bank, said a bid for gas fields would fit with Russian president Vladimir Putin’s strategy of using natural resources to boost Russia’s influence. “I could see some potential deal around the natural gas fields – energy is something that Putin believes makes the country powerful,” he said. “It would fit with his long-term agenda.”
A deal on banks appeared less likely, he said, particularly considering Russian clients were now seeking to move funds out of Cyprus and its banks were looking less than healthy.
Teetering Cypriot banks have been crippled by their exposure to the financial crisis in neighbouring Greece, where the eurozone debt crisis began.
The uncertain situation in Cyprus is “very damaging” and needed to be addressed immediately, the EU Council president, Herman Van Rompuy, told the European parliament.
Angela Merkel, the German chancellor, said Cyprus’s banking sector, which through foreign funds attracted by low tax deals has swelled to eight times the country’s GDP “is not sustainable”.
The European Central Bank’s chief negotiator on Cyprus, Jörg Asmussen, said the ECB would have to pull the plug on Cypriot banks unless the country took a bailout quickly. “We can provide emergency liquidity only to solvent banks and … the solvency of Cypriot banks cannot be assumed if an aid programme is not agreed on soon, which would allow for a quick recapitalisation of the banking sector,” Asmussen told the German weekly Die Zeit on Tuesday. Austria’s chancellor, Werner Faymann, said he could not rule out Cyprus leaving the eurozone, although he hoped its leaders would find a solution for it to stay.
Cyprus’s Orthodox church said it was willing to mortgage its assets to invest in government bonds. The church has considerable wealth, including property, stakes in a bank and a brewery.
Troika of international lenders leaves country after failing to agree over future of 25,000 civil servants
Greece’s “troika” of international lenders – the EU, the European Central Bank and the IMF – have left the country amid a dispute over sacking 25,000 civil servants.
After extending their trip by several days, troika inspectors said they would return in April to finish their review.
Insiders confirmed that progress on an agreement to unlock the country’s next €2.8bn aid instalment, vital to public coffers, had been impeded by creditors’ demands to cut 25,000 civil servants from the state payroll by the end of the year.
Athens’s fragile government had hoped to convince lenders of the need to gradually transfer the employees into a special labour reserve by 2014, citing record levels of unemployment, anger with austerity and growing social unease. None of the mission chiefs was persuaded, however, given the reluctance of past administrations to shed staff who under the constitution enjoy jobs for life. Other disagreements included a relief plan for overindebted households and a controversial property tax levied through electricity bills.
Although both sides put on a brave face and played down the postponement – with the Greek finance minister Yannis Stournaras saying “there has been significant progress in the talks with the troika” – well-briefed sources did not share the same view. A member of one of the governing parties said there were “very real concerns” that further aid disbursements to Greece would be stopped. “The government is not going to axe civil servants. Full stop. There are very real concerns that come the summer the next loan disbursement [from the bailout] will not be made. Nothing is certain.”
If Athens refuses to press ahead with redundancies, the inevitability of the government having to adopt further cuts and tax rises looms. With revenue shortfalls in January and February described as much worse than expected, there are fears that the country’s reform programme will be derailed.
The Greek impasse came as European leaders joined battle in Brussels in an increasingly sterile argument over whether austerity or stimulus was the magic formula for arresting decline and spurring growth in the EU and single currency zone.
But for the first time since the sovereign debt and single currency crises ushered in the age of austerity three years ago, the leaders of the 27 countries or the 17 of the eurozone were unlikely to take any far-reaching decisions.
The summit was the first since the heads of government were stunned by the outcome of the Italian election, which delivered a resounding rejection of the harsh medicine prescribed by Germany and administered by Brussels.
“Italy is the talk of the town,” said a senior EU official. “One of the things that has shifted the debate is the Italian election. People are worried,” added a senior European diplomat.
But all the signs from Berlin and Brussels indicated that while voters may kick out policymakers, they cannot overturn the policies since the room for manoeuvre in the declining economies of, say, Italy or France, as well as bailout recipients, is too narrow if they want to retain the confidence of the financial markets.
“If you need to get people to lend you money, if you finance yourself in the markets, an economic policy shift is not viable,” said the senior diplomat. “It’s about credibility.”
The Thursday evening summit focused on economic policy options and was to be followed by another meeting of the 17 eurozone leaders at which Mario Draghi, the head of the European Central Bank, was to brief the meeting and was expected to name and blame countries failing to implement adequate structural reform.
While the draft summit communique repeatedly referred to the need to stimulate growth and deplored Europe’s record levels of unemployment – more than 26
Fears that deadlock will lengthen Italy’s two-year recession and spill over into rest of the eurozone hit markets across Europe
Three years of German-led austerity and budget cuts aimed at saving the euro and retooling the European economy was left facing one of its biggest challenges as Italian voters’ rejection of spending cuts and tax rises opened up a stark new fissure in European politics.
The governing stalemate in Rome and the vote in the general election – by a factor of three to two – against the austerity policies pursued by Italy’s humiliated caretaker prime minister, Mario Monti, meant that the spending cuts and tax rises dictated by the eurozone would grind to a halt, risking a re-eruption of the euro crisis after six months of relative stability.
Fears that the deadlock will lengthen Italy’s near two-year recession and spill over into the rest of the eurozone hit markets across Europe. The Italian banking sector fell 7% in value, dragging the main MIB stock market index 4% lower.
The market turmoil in Milan spread to Germany, France and the UK, with domestic banks among the biggest fallers. Deutsche Bank saw almost 5% knocked off its value, while Barclays suffered a 4% decline. The FTSE 100 fell 1.4%. The German Dax slumped more than 2% and the Paris Cac was down 2.75%.
The cliffhanger vote saw the maverick comedian Beppe Grillo’s 5 Star movement take almost one in four of the votes and the political revival of the ex-prime minister Silvio Berlusconi. But the narrow victor, Pier Luigi Bersani, on the centre-left, claimed the mantle of the premiership, although it was unclear if he would be able to form a government.
Despite the withering popular verdict on cuts and taxes, Brussels and Berlin insisted the austerity programme had to be continued in Italy. France and others seized on the outcome for their own purposes, arguing for a relaxation of spending cuts and greater emphasis on policies to boost growth and job creation.
Bersani moved to try to cobble a government together by wooing the upstart Grillo with tentative talk of a reformist leftist coalition. Looking weary, Bersani said it was time for the 5 Star movement to do more than just demand a clean sweep of Italy’s established political order.
“Up to now they have been saying ‘All go home’. But now they are here too. So either they go home as well, or they say what they want to do for their country and their children.”
Grillo said earlier his followers in parliament would not join a coalition, but would consider proposals “law by law, reform by reform”.
Bersani said that, since his four-party alliance had won an outright majority in the lower house of the Italian parliament and more seats than any other grouping in the Senate, it had a responsibility to suggest ways in which Italy could be governed, despite the deadlock in the upper house.
Shunning the idea of a grand coalition with Berlusconi and the right, he proposed a government committed to a five-point plan for sweeping reform of Italy’s political parties and institutions.
The north-south split in Europe opened up by the election presaged clashes between eurozone governments, likely to surface at an EU summit next month, amid calls for a shift away from the harsh regime prescribed and driven through by Berlin in recent years as the price of bailing out insolvent eurozone periphery countries.
The Italian stalemate combines with tough negotiations over a bailout for Cyprus, being resisted by Germany, worries about the French economy, an unresolved debt crisis in Spain, and David Cameron’s decision to throw Britain’s future in Europe into question, making EU politics unusually volatile.
“Italy plays a central role in successfully overcoming Europe’s debt crisis,” said the German foreign minister, Guido Westerwelle.
“So we assume that the policy of fiscal consolidation and reform will be consistently followed by a new government.”
Angela Merkel, bidding for a third term as German chancellor in September, has been banking on a period of eurozone calm in the run-up to her election, but Italian voters have wrecked that calculation.
The Dutch finance minister, Jeroen Dijsselbloem, recently made head of the political committee that runs the euro, said Monti’s policies had to be continued. “They are crucial for the entire eurozone.”
The European Commission echoed the calls for sticking with the austerity medicine. Italy has the highest national debt level in the eurozone after Greece, although its budget deficit is in better shape than many others, including France and the Netherlands.
But Paris led the chorus for a policy shift. French government ministers, including Pierre Moscovici, the finance minister, demanded a change of course in remarks directed at Berlin.
Spain waited anxiously to see what impact the Italian leap in the dark would have on its debt crisis. “This is a jump to nowhere that does not bode well either for Italy or for Europe,” said the foreign minister, Jose-Manuel Garcia-Margallo, adding he was “extremely concerned” about the effect on Spain’s borrowing costs.
Both Berlusconi and Grillo have been harshly critical of the Germans, decried Monti’s austerity packages, and have raised questions as to whether Italy, the eurozone’s third biggest economy, should remain in the single currency. Grillo has called for a referendum on the matter.
Berlusconi rounded on the Germans on Tuesday, declaring that the “spread” – the difference between how much Italy and Germany pay to borrow on the bond markets – had been “invented” two years ago. This was code for saying that Berlin and Frankfurt, the German government and the European Central Bank, conspired to push up the cost of Italian borrowing in 2011 in order to topple Berlusconi and bring in Monti, the technocratic darling of the eurozone elite.
The turmoil saw Italian bond yields also jump, indicating that any new government will be forced to pay a higher interest rate on its debts.
The 10-year Italian bond yield edged back into dangerous territory on Tuesday after it passed 4.9%, although this is a far cry from 2011 when the yields shot above 7%.
Fears that political deadlock will lengthen Italy’s recession and spill over into rest of the eurozone has hit European markets
Go here to read the rest: Steve Bell on the Italian election – cartoon
UBS chairman and top Chinese economist provide dissenting voices amid optimism of many speakers at Davos
The World Economic Forum’s annual meeting broke up on Saturday night amid warnings that attendees were too relaxed and optimistic about the state of the global economy.
Delegates left the congress centre in Davos with the words of Axel Weber, chairman of Swiss bank UBS, ringing in their ears. “In my view the mood [at Davos] borders on complacency,” Weber said. “The mood has been good, in brackets too good to be true.”
Many speakers at the four-day meeting at the Swiss ski resort predicted that the worst of the financial crisis was over, as stock markets continued to rally this week. Weber, though, warned that an unexpected event could easily puncture the mood, citing political events such as autumn’s general election in Germany.
“My fear is that 2013 will be a repeat of 2012,” explained Weber in a panel session to debate the global agenda for the next 12 months. He said that last year also began well, with companies posting solid financial results, before markets became gripped by fears that Greece would topple out of the eurozone.
Christine Lagarde, managing director of the International Monetary Fund, was also cautious, describing the recovery as “fragile and timid”.
Influential Chinese economist Li Daokui cited the disagreements in the US over its debts as a key risk to the global economy this year.
“In the eurozone we have had promises of action … In the US, my observation is that we’ve not even had promises,” said Li, a former adviser to the People’s Bank of China’s Monetary Policy Committee. He suggested there was a 30% risk that the investor panic of summer 2011, when stock markets tumbled, would return this year if solid progress was not made in America.
Last Wednesday the US House of Representatives passed legislation suspending the legal limit on government borrowing for four months, which means the issue could dominate most of the first half of 2013.
Weber, the former head of the Bundesbank, also took issue with Mark Carney’s assertion earlier in the day that monetary policy was not “maxed out”.
“I think monetary policy now is too loose”, Weber warned, saying investors were struggling to “price risk” now that central banks have expanded their balance sheets and pumped huge amounts of liquidity into the markets.
Frederico Curado, president of Brazilian aircraft manufacturer Embraer, agreed that businesses are much more confident about economic prospects. “Companies are sitting on probably unprecedented amounts of cash. Hopefully this optimism we are seeing will translate into investments.”
Curado also reminded the Forum that the real economy needs further help, describing unemployment across the world as a “huge, huge issue for everyone.”
World Economic Forum has taken on a less triumphalist tone since the boom years of the nineties and noughties – and it is nowhere near a solution to the world’s problems
Davos used to be the winners’ club. Throughout the boom years of the 90s and noughties company chief executives would gather every winter high up in the Swiss Alps to discuss in a lordly fashion the world economy and how it could be revised to suit their objectives and views: more globalised, more marketised. But in the five years since the collapse of Lehman Brothers (whose boss Dick Fuld was a Davos regular), the World Economic Forum has taken on a necessarily less triumphalist tone. It might now be called the failures’ club. Not the losers’ club, you understand: even amid the slump, the wealthy continue to do rather well – as evidenced by Berkeley economist Emmanuel Saez’s finding that the top 1% of Americans saw their incomes grow by 11.6% in 2010, even while incomes for the bottom 99% rose only 0.2%. But the economic model pined after by the Davos set is now bust; any lasting fixes or reforms will have to come from very different places and perspectives.
No doubt Klaus Schwab and his WEF guests are at least partly aware of that. True, the Davos gatherings may bear the same foot-dragging titles as ever (This year’s being “Resilient Dynamism“, whatever that means) rather than the more appropriate “We Got It Wrong”. But the usual mix of businessmen (four out of five delegates are male) and financiers and government ministers is now spiced up with trade unionists, anti-poverty campaigners and dissident economists. Sure, this must be an attempt to borrow credibility, but it is also a stab at greater plurality. Yet clubs – which is what the WEF is, formally – are inherently unplural things, especially Davos, which charges £45,000 for basic membership and one-time entrance and £98,500 for access to its private sessions. It is all very well for Mr Schwab to inveigh against inequality; it would be more meaningful if he pushed the bosses at Davos to sign a joint promise to limit pay gaps in their own companies. Fat chance of that.
And yet the agenda of extending markets and stripping workers of pay and conditions pushed at Davos (and by countless other organisations, such as the IMF and the eurozone) is finished. Five years on from the Wall Street crash, the world economy is still palsied. The GDP report released in the UK this Friday will underline the mess made by the austerity-pushers, just as much as the economic wreckage on show in Greece, Spain and Portugal. And the latest indicators of slowing expansion in China should put paid to any vain hopes that other cylinders in the world economy would kick in. The only way out of the doldrums will be for the west to accept that this is a crisis of demand, rather than supply – one that can only be countered by big spending on jobs and raising wages. Again, there is little chance of such solutions emerging from the Davos set, or of serious proposals for real industrial policies.
But there is a more fundamental problem, too. The programme of corporate-led globalisation pushed by multinationals is surely also exhausted. The term “Davos man” was coined by the political scientist Samuel Huntington. According to him, the members of this global elite have “little need for national loyalty, view national boundaries as obstacles that thankfully are vanishing, and see national governments as residues from the past whose only useful function is to facilitate the elite’s global operations”. Yet in the crash, it was governments that had to step in and bail out their national banking systems – and then try to reflate their domestic economies.
And as this era becomes more clearly revealed as one where economic growth is scarce, we can expect countries to try to export more and more to other nations. This is what lies behind the talk of “currency wars” and “trade wars” – and it is only just getting going. There will surely be much more naked mercantilism on display in the next few years. The Davos set will oppose much of this. But by pushing a phoney, inequitable globalisation, they have created the conditions for the backlash against their own ideology.