Euro zone finance head to be questioned

The head of the 17-strong group of euro zone finance ministers will be questioned by MEPs in Brussels today on his handling of the Cypriot bailout, as officials confirmed Cypriot banks will remain closed until Tuesday amid fears of a run on deposits.

Dutch finance minister Jeroen Dijssebloem, who replaced Luxembourg prime minister Jean-Claude Juncker less than two months ago as head of the euro zone finance ministers, will face questions from the European Parliament as recriminations continued yesterday in Brussels about the handling of the bailout.

The European Commission said yesterday it supported the agreement reached on Saturday morning although it did not agree with everything in the proposal.

“The Commission felt the duty to support it since the alternatives put forward were both more risky and less supportive to Cyprus’s economy,” a spokesman said, noting that the Commission had expressed its preference not to apply a levy on deposits below €100,000 before the vote in the Cypriot parliament.

Euro zone finance ministers, including Michael Noonan, and representatives from the IMF, ECB and European Commission agreed in weekend talks to a €10 billion bailout for Cyprus, including an unprecedented decision to tax deposits.

“This solution was the best possible one at the time,” a European Commission spokesman said yesterday.

Up to Cyprus
While European authorities defended their approach to the bailout, which was rejected by the Cypriot parliament on Tuesday, they stressed that it was now up to Cyprus to find a solution to the country's unsustainable debt, echoing comments from Germany.

Representatives from the troika of international lenders met with Cypriot authorities in Nicosia yesterday as discussions continued between legislators on alternative ways to raise the €5.8 billion required by the international lenders, including the possibility of nationalising the country’s pension fund.

The relatively benign market reaction to the situation in Cyprus has helped to strengthen the hand of the troika of international lenders, particularly the European Central Bank, which is providing emergency liquidity assistance to Cyprus’s indebted banks. Markets rose yesterday and the euro strengthened on expectations that the Cypriot authorities would agree on a bailout deal that would be agreeable to international lenders.

Banks closed
Nonetheless, as confirmation came through last night that Cypriot banks will remain closed until Tuesday, fears of a bank run pervade.

The ECB has threatened to withhold emergency funding from Cyprus’s two main banks if they are deemed to be insolvent. ECB executive board member Jörg Asmussen said that the solvency of Cypriot banks “cannot be assumed” if an aid programme is not agreed on soon.

ECB sources declined to comment on what time frame would be required by the central bank for Cypriot banks to be recapitalised in order to secure continued ECB emergency liquidity support.

While the euro zone proposal to tax deposits would yield money quickly, other recapitalisation options, including some potential arrangements with Russia, could take much longer.

Russia visit
Meanwhile, EU economics and monetary affairs commissioner Olli Rehn, a key figure in the euro group's response to the Cypriot crisis last weekend, will not travel to Russia today as part of a scheduled visit of European Commissioners, with officials stressing that he intends to focus his attention on the Cypriot bailout issue and deal with "any options, any scenarios" that may emerge.