Waiting for Plan B

The ultimatum set by the European Central Bank has again put pressure on Cypriot politicians. The ECB wants to pull the brakes on its emergency aid by Monday – unless Cyprus manages to fulfill the conditions for the bailout package. And without the help from the ECB, the country's two largest banks are likely to collapse.

The original agreement with the eurozone from last Saturday (15.03.2013) had planned for a levy on deposits in Cypriot banks. That's a measure that would also have hit the many foreign account holders, among them many Russians. Initially, the idea was also that deposits of less than 100,000 euros ($130,000) would have been required to pay the levy, though that measure now seems to be off the table.

So far, the Cypriot parliament has wanted to avoid any meddling with bank deposits in order not to jeopardize the attractiveness of Cyprus as a financial hub. But it remains to be seen whether the island will be able to meet the bailout conditions without such a levy. And even if it does, Nicosia's Plan B would still need to be approved by the finance ministers of the Eurogroup and by the International Monetary Fund (IMF). And all of that will have to be done by Monday at the latest.

Eurogroup expects contribution from savers

It's in this dramatic state of affairs that Eurogroup chief Jeroen Dijsselbloem had to answer questions in the EU Parliament on Thursday, not an easy thing to do. At the moment the Eurogroup doesn't really have any other option but to wait for Cyprus' alternative proposal, he said, adding that it did matter what that new plan would look like.

"We hope for a solution which would shift the balance even more to the big deposits," Dijsselbloem said. He insisted that he personally had always wanted to spare the deposits of less than 100,000 euros. But the initial agreement would still stand, meaning that all countries would need to cooperate.

Dijsselbloem said there couldn't be a solution that would just be forced on one of the involved parties. However, he didn't want to answer the question as to who was to blame for that earlier idea to also charge the small savers – which was the idea that got Cypriots so up in arms against the deal.

As Eurogroup chief, he said he would take responsibility for the Saturday agreement but pointed out that it was a collective agreement. Other parties to that weekend deal – such as German Finance Minister Wolfgang Schäuble and the EU Commission -- have clearly put the blame on the side of Cyprus.

Communication disaster

It was that initial agreement that lead to an outcry across Europe. Many feared, and still fear, that this could mean that the EU-wide deposit guarantee to 100,000 euros might be worth nothing in the future, and that governments in other countries might decide to raid people's private savings.

Politicians and EU officials could dismiss these fears as much as they want – the damage was already done, a fact for which Dijsselbloem was under fire on Thursday.

German MEP Peter Simon said citizens didn't care how a measure like this would be called. "People across Europe will learn from this that they can no longer trust any promises of that sort," he said.

Dijsselbloem indirectly admitted that the Eurogroup had had a bit of a communications disaster with the issue. But he didn't want to go as far as admitting to a huge loss of trust. With the financial markets, he claimed that in fact the opposite was the case.

How much debt can Cyprus carry?

With regard to the size of the bailout, only 10 billion euros, Dijsselbloem explained this was the maximum possible debt for Cyprus. He wanted to counter criticism that the EU was stingy with Cyprus. In total, the island is estimated to need some 17 billion euros. The Eurogroup chief said that in theory the bailout could also be higher, but said this would be too much of a burden for Cyprus to shoulder and to repay.

Dijsselbloem also warned over having too high expectations that Russia might jump in and lend a hand. Should Moscow extend a loan, it wouldn't exactly help with Cyprus' debt problem, he said. And in any case, Cypriout Finance Minister Michalis Sarris has already failed to get more money from the Kremlin.

Many in the EU say Cyprus is not 'too big to fail' and believe Nicosia is only using this threat to up the pressure and obtain better conditions for their bailout. Dijsselbloem, though, reiterated that he in fact does believe that there is a systemic risk, citing the nervousness as to what is to become of the small island state as proof. That nervousness, however, was mainly about the deposit guarantee. Financial markets have largely remained calm. But patience with Cyprus is running out.