The Central Bank of Cyprus warned that one large bank, the Cyprus Popular Bank, would probably have to shut its doors Tuesday morning if nothing is done.
Expectations differ on how Europe would be affected if Cyprus fails to come to terms on the bailout. In Germany, where an election-year Parliament will have to vote on any European assistance, public opinion is skeptical of what has been portrayed locally as a bailout of Russian oligarchs. Almost a third of Cyprus’s deposits are estimated to come from Russia, and many European policymakers suspect that the island is a money-laundering hub, making generous rescue packages politically difficult to support.
Given the choice, German leaders widely feel that a Cypriot exit from the euro zone is a risk they are willing to take.
“I think it would be manageable,” said Rainer Bruederle, a candidate for chancellor who is the parliamentary leader of the Free Democrats, the junior member of Germany’s ruling coalition.
But many analysts fear that concerns could quickly spread to larger troubled countries such as Spain and Italy. Italy’s economy is almost 90 times as large as Cyprus’s, making the consequences of what happens on the island of 1.1 million people far graver than if it were to implode in isolation.
Cyprus is “definitely a systemic risk, and the unrest of the last couple of days have proved that, unfortunately,” said Dutch Finance Minister Jeroen Dijsselbloem, the head of the caucus of countries that share the euro, in the European Parliament on Thursday.
Investors have reacted calmly to the turmoil, with markets only modestly down this week. A Thursday bond auction in Spain — a crucial test of whether anxiety about Cyprus was spreading to other vulnerable economies — actually brought lower borrowing costs for bonds with five- and 10-year maturities.
Cypriot Finance Minister Michalis Sarris has been in Moscow since late Tuesday seeking emergency funding from Russian leaders, who have been apoplectic about the possibility that Russian bank deposits in Cyprus would take a hit. Cypriot Energy Minister Georgios Lakkotrypis also was in Moscow, fueling speculation that Cyprus was offering access to its natural gas resources as a sweetener to any deal.