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Cyprus may wind up Laiki Bank

Failure could trigger an economic collapse and force the nation out of the euro area.

The Cypriot parliament would be asked to wind up Cyprus Popular Bank, trading as Laiki Bank, and split it into a good and bad bank, according to Panicos Demetriades, governor of the Central Bank of Cyprus.

The county is planning to restructure its banking industry as the European Central Bank said that emergency liquidity assistance (ELA) to the island’s two biggest banks would be cut off if the government failed to agree on a bailout by Monday.

ECB deadline would cut off €9bn in ELA from the Central Bank of Cyprus that has been used to fund the Bank of Cyprus and Laiki.

Demetriades said: “The banking system needs restructuring otherwise it will go bankrupt and it needs to be done immediately. By establishing this legal framework, resolution measures will be imposed on Popular Bank [Laiki] so that it will be in a position to continue to offer banking services to its clients.”

Laiki Bank’s deposits up to €100,000 would be guaranteed and bank jobs would be safeguarded.

“Otherwise, Laiki Bank will be led to immediate bankruptcy and termination of its operations, with catastrophic consequences for the workers, the depositors in their entirety, our banking system and the country’s economy,’’ Demetriades added.

Meanwhile, long queues of customers were seen at ATMs of Laiki bank across the Cypriot capital Nicosia as it imposed a €260 limit on cash withdrawals.

International lenders have agreed a €10bn rescue of the island subject to increase of €5.8bn from a Cypriot bank deposit levy.

The eurogroup on Cyprus, in a statement, said: “The eurogroup stands ready to discuss with the Cypriot authorities a draft new proposal, which it expects the Cyprus authorities to present as rapidly as possible.

“The eurogroup would subsequently, on the basis of a troika analysis that needs to be undertaken, be prepared to continue negotiations on an adjustment programme, while respecting the parameters defined earlier by the eurogroup.”

Jeroen Dijsselbloem, who chairs the eurogroup, said Cyprus represented a systemic threat to the eurozone – further underscoring the danger of an escalation.

Dijsselbloem said: “I don’t think the ECB is using threats. The ELA facility can only be made available to banks that are [solvent]. There has to be at least the prospect in the near future of a programme of recapitalisation, of bringing these banks within a safe haven again.”

José Manuel Barroso, president of the European Commission, said: “Russia was not informed also because the governments of Europe were not informed – let’s be completely open and honest about that issue,” Mr Barroso said. “There was not a pre-decision before the eurogroup meeting . . . of course, here in Russia today, I will be, of course, as always, open to listen to the concerns of our Russian partners.”

Cyprus joined the euro in January 2008.