Proposal in danger even before ink is dry

WHAT will comprise the “solidarity fund” proposed by Cyprus last night in its desperate effort to secure support from international lenders?

The government urgently needs support from the European Central Bank and the IMF to stall a threatened withdrawal of ECB support and prevent a massive banking crisis hitting the island on Monday.

But where will the money come from? What state assets will be put into it? Will it involve resort to pensioners’ savings to bail the country out? And what controls does Cyprus propose to stall a mass flight of capital in the coming days?

These are the searching questions to which the “troika” comprising the IMF, the ECB and the European Commission will now be seeking answers. The details of the proposed fund will be closely scrutinised before any support will be extended. And German chancellor Angela Merkel has already made clear the use of the country’s social security funds as the basis for a bailout would be rejected.

That clear warning would appear to scupper this proposal even before the ink is dry.

If the details are not acceptable to the troika, the country faces chaos. Without an agreement in place, any reopening of the country’s banks would be instantly followed by a stampede of capital out of the country.

Cypriot MPs also agreed last night to impose capital controls but are still to decide whether to impose a levy on large bank deposits. This means tough restrictions on how much money people can take out of their bank and on their ability to transfer funds.

Such restrictions make a mockery of core EU commitments to the free movement of capital.

But such is the desperate need to secure emergency funding, Cyprus must either find the money from somewhere – or press the nuclear button of a euro exit, an outcome all sides are most anxious to avoid.