EU gives Cyprus bailout ultimatum, risks euro exit

by Michele Kambas and Matt Robinson, Reuters.com  |  published on March 22, 2013

People queue up to make a transaction at an ATM outside a branch of Laiki Bank in Nicosia

The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In a sign it was at least preparing for the worst, the Cypriot government sought powers on Thursday to impose capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen following this week’s shutdown.

In stark warnings earlier in the day, the European Central Bank said it would cut off liquidity to Cypriot banks and a senior EU official made clear to Reuters that the bloc was ready to see the bankrupt island banished from the euro in the belief it could then contain damage to the wider European economy.

The ECB ultimatum came as the island’s leaders struggled to craft a “Plan B” to raise the 5.8-billion euro contribution demanded by the EU in return for a 10-billion euro ($13-billion) bailout from the EU and IMF; angry Cypriot lawmakers threw out a tax on deposits, calling the EU-backed proposal “bank robbery”.

In a mark of strained relations and confusion, euro zone officials conceded during a conference call on Wednesday which Cyprus refused even to join that the situation was “in a mess”.

Zone finance ministers held more talks on Thursday evening on a crisis that has unsettled the entire continent and not just put the Cypriot economy in jeopardy but billions of euros held on the island by foreigners, notably from Russia.

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