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Cyprus Bailout Incites Turmoil as Blame Flies

BRUSSELS — A plan to rescue the tiny European country of Cyprus, assembled overnight in Brussels, has left financial regulators, German politicians, panicked Cypriot leaders and a disgruntled Kremlin with a bailout package that has outraged virtually all the parties.

A Russian market in Limassol, Cyprus. Russia was angry it was left out of talks to aid Cyprus, where it has billions in banks.

In the end, a bailout deal that was supposed to calm a financial crisis in an economically insignificant Mediterranean nation spread it wider. Word of the plan unnerved markets across Europe, raised fears of bank instability in Spain and Italy and sent pensioners into the streets of the island’s capital, Nicosia, in protest.

As markets tumbled and the Cypriot Parliament fell into turmoil, salvos of blame were hurled back and forth across the Continent.

Officials scrambled to explain what went wrong and how best to control the damage of what Philip Whyte, a senior research fellow at the Center for European Reform, called a “completely irrational decision” to make bank depositors liable for part of the bailout. The deal flopped so badly that finance ministers who came up with it shortly before dawn on Saturday were on the phone to each other Monday night talking about ways to revise it. Whatever the outcome, the dispute is a vivid demonstration of why Europe, which until recently was congratulating itself on having weathered the worst of the financial storm, has trouble making decisions with so many different interests represented at the table.

Politics, both domestic and international, get in the way of economics and make it difficult for wealthy countries to line up behind a plan to help the smallest ones. The northern European nations have grown so weary of bailouts for their southern neighbors that they were intent on exacting a hefty contribution from their latest supplicant. Germany in particular, with parliamentary elections looming in September, was set on driving a hard bargain.

A wild card in this instance were the Russians, who have deposited billions in Cypriot banks, extended a $3.25 billion line of credit to Nicosia in 2011 and were in negotiations to help out Cyprus once again. Cypriot leaders apparently were so concerned with keeping their wealthy offshore Russian customers happy that they pushed their own citizens to pay even more than some of the lenders were demanding.

The Russians reacted angrily to a so-called stability tax on deposits in Cyprus, and at being left out of the negotiations. On Monday, Russia’s minister of finance, Anton Siluanov, warned that Russia might not extend the existing credit line because the Europeans had not consulted authorities in Moscow about the deposit levy plan. On Sunday, one Russian official was reported by the Interfax news agency as advising Russians to withdraw funds from Cyprus, saying the banking system was untrustworthy.

The all-night discussions began Friday and ran for 10 hours, ending shortly before dawn on Saturday. Cyprus needed to come up with billions of dollars to help cover the costs of the bailout of the country’s financial sector, or its European allies said they would leave it to face the prospect of collapse alone.

Each of the major stakeholders, which included the International Monetary Fund, the European Central Bank and euro zone finance ministers, entered the room with a conflicting goal. Protecting the small-time saver was at the top of no one’s list. The result was a compromise solution everyone is now unhappy with, officials say, one that stands to cost ordinary Cypriot depositors 6.75 percent of their savings.

The Germans and their northern European allies wanted to exact a maximum contribution from Cyprus to ensure the deal could pass their recalcitrant, bailout-weary parliaments at home. A confidential report by the German foreign intelligence agency, known by its German initials as the B.N.D., was making the rounds, one that painted the island as a haven for money-laundering. The stigma attached to helping the Cypriots — and the political cost in an election year — was rising rapidly.

The I.M.F. was dead set on keeping the debt at what its number-crunchers considered a sustainable level. The Cypriots, meanwhile, wanted to spread the pain around.

Nicholas Kulish reported from Berlin and Andrew Higgins from Brussels. Reporting was contributed by Andrew E. Kramer and David Herszenhorn in Moscow, Jack Ewing in Frankfurt and Andrew Siddons in Washington.

This article has been revised to reflect the following correction:

Correction: March 19, 2013

An earlier version of this article misspelled the surname of a contributor. He is Andrew Siddons, not Siddon.

Bound to Sea but Buried in Debt, Spain’s Fishermen Blame Bloc’s Policies

Since then, they have run into problems: declining fish stocks, tighter quotas on catches, rising operating costs and a sharp economic downturn that has slashed both fish prices and demand.

The impact has devastated much of Spain’s coastal economy. It has also generated intensifying criticism of European Union policies that, environmental groups and experts say, have increased fishing communities’ dependency on subsidies to make up for the decline in both revenues and fish populations, even as the bloc continues to pay generous subsidies to scrap older vessels to upgrade Europe’s fleet. The new boats are typically bigger and more powerful, adding pressure on declining fish populations.

Coastal regions, they warn, are in the grip of a vicious downward spiral, with steep economic and environmental costs that they are urging leaders to halt.

“Spain has been one of the worst examples of using public money to modernize and increase the capacity of the fleet,” said Saskia Richartz of Greenpeace in Brussels, the group’s European Union oceans policy director. “We have now reached a crisis point, with a generation of fishermen whose boats are owned by banks and who have no fish to catch.”

In coastal areas like Sanlúcar de Barrameda, a town in the south near Cádiz, as fishermen struggle to repay the mortgages on their vessels, many say they resent that bloc policies distorted their financial incentives and then left them high and dry once Spain’s economic crisis hit.

The European Union stopped directly financing boat purchases in 2005 to curtail the size of Europe’s fleet, but for many here the damage was already done. José Antonio Díaz León, the president of the fish market of Sanlúcar, home to about 100 fishing boats, estimated that “95 percent of the owners here have a mortgage on their boat, which many simply can no longer afford.”

Among Sanlúcar’s disillusioned is José Odero, who bought a new boat worth almost $650,000, with twice the tonnage of his previous vessel. Although the world financial crisis was already under way at the time, Mr. Odero said he had no difficulty securing a bank mortgage and had felt confident that the investment would translate into higher revenue. He declined to say whether he received a European Union subsidy.

The investment was “a massive mistake,” Mr. Odero said, as quota restrictions, falling fish prices and rising fuel costs left his income stagnant. This year Mr. Odero was forced to ask his bank to delay his mortgage payments of about $1,025 a month.

“I’ve been given a bit more time, but I’m slowly drowning in financial problems,” Mr. Odero added. “I would love to sell my boat now, but there’s nobody willing to pay decent money for it.”

His story is repeated in places like the northwestern city of Vigo, Spain’s biggest fishing port, where fishing helps sustain about 60,000 of its 300,000 residents, according to local officials.

Claudio Fernández Ibañez, chief executive of Hermanos Fernandez Ibañez, a fish brokerage house in Vigo, said many fishermen had no choice but to scale back or shut down. “Those who have not managed to amortize fully their boat purchase costs before the crisis are now really suffering, trying to sell unaffordable boats for which there is really no demand,” he said.

Given the economic crisis, he said, Spanish consumers are downgrading to cheaper and largely imported fish, with prices for products like swordfish dropping 40 percent this year. “The E.U. is putting all the focus on the environmental impact of fishing and ignoring completely our economic problems,” he said.