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TheStreet Open House

Cyprus in Last-Minute Talks With EU

European Council President Herman Van Rompuy was chairing a meeting, but a spokesman insisted his role was not to force a deal but to encourage discussion.

To avoid bankruptcy or the collapse of its banking system, Cyprus needs significantly more than the 10 billion euros the international creditors are willing to lend it. They fear that more loans would balloon the country's debt level to an unsustainable level. For that reason, the country must somehow raise the additional money.

Cyprus has "to fulfill a difficult mission to save the Cypriot economy and avert a disorderly default threatening the economy if there is no final deal for the loan agreement," government spokesman Christos Sylianides said in a written statement Sunday.

Officials fear that a Cypriot bankruptcy, which would likely force the country to become the first eurozone member to leave the currency bloc, would roil markets and result in uncertainty that could engulf other weaker eurozone nations, leading to capital flight and higher government borrowing costs.

Anastasiades was also set to meet IMF Chief Christine Lagarde and ECB President Mario Draghi.

If the Cypriots agree to a plan on Sunday, the IMF, European Central Bank and European Commission will then determine whether it meets the requirement that Cyprus' debt, including any new bailout loan, be sustainable over the long run.

Any new proposal would then have to be approved Sunday evening by the Eurogroup, the gathering of finance ministers from the 17 EU countries that use the euro currency.

Their decision might come only as a broad political agreement, with technical details to be hammered out in the coming days. But without an agreement in principle, the ECB is likely to pull the plug on the country's banking system.

Cyprus already took significant steps toward cementing a new plan Friday night, when lawmakers voted to restructure ailing banks, restrict financial transactions in emergencies and set up a "solidarity fund" that should act as the vehicle for raising funds from investments and contributions.

The bank restructuring will include the country's second largest lender, Laiki, which suffered heavy losses after being exposed to toxic Greek debt. The restructuring and the sale of Greek branches of Cypriot banks are expected to significantly lower the 5.8 billion euros that the country needs to raise on its own to secure the rescue loan package.

Cypriot banks have been closed this past week while the plan was being worked out, and are not due to reopen until Tuesday. Cash has been available through ATMs, but many have run out quickly.

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Associated Press writer Elena Becatoros in Nicosia, Cyprus, contributed to this story.

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Don Melvin can be reached at https://twitter.com/Don_Melvin

Juergen Baetz can be reached at http://www.twitter.com/jbaetz

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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