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Cyprus crosses red lines for EU bailout

14 March 2013, 12:14 CET
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(NICOSIA) - After nine months of stop-start negotiations, cash-strapped Cyprus is on the verge of securing an EU bailout but analysts say it will come at a hefty price.

Eurozone finance ministers are to meet on Friday after a two-day EU summit in Brussels, to thrash out a bailout plan for Cyprus that will hopefully conclude marathon talks.

"The longer this has gone on, the more drastic the proposed measures have become, the craziest idea being a haircut on deposits, which would only ensure that EU taxpayers never get their money back," analyst Fiona Mullen told AFP.

The government has dismissed any suggestion of a haircut on bank deposits to help pay for a rescue package estimated at 17 billion euros.

But in order to seal an agreement, the newly elected government has had to cross red lines on the island's low corporate tax rate and on the sale of profitable state utilities.

"It looks like it will have to accept an increase in the corporate tax rate to 12.5 percent, which until now was the lowest in the eurozone at 10 percent," said Mullen.

"And of course privatisation used to be taboo, but they will not get a bailout without it."

She said Cyprus may also have to accept more "damaging taxes", such as the financial transaction tax, which will hit the big foreign exchange trading companies.

Cyprus requested financial assistance from the EU in June last year after its two largest banks -- Bank of Cyprus and Popular Bank -- sought state aid following massive losses estimated at €4.5 billion resulting from a Greek debt haircut.

Nicosia has argued that its eagerness to support Greece and show eurozone solidarity has been its undoing.

With the island's banks being the most exposed to Greek debt, Cyprus simply could not afford to agree a 75 percent write-down of its bond holdings.

And because state finances had deteriorated, the government was unable to access international financial markets to assist its own banks and so applied for aid.

As part of a rescue package reached last year, Greece obtained a partial reduction in debt owed to private creditors, who included Cypriot banks.

Cypriot President Nicos Anastasiades has pushed for this to be taken into account in talks with international creditors on the island's own bailout, which has been earmarked for the end of March.

"The consequences of the haircut of Greek bonds was not handled on our side in the best possible manner within European institutions," Anastasiades told To Vima newspaper over the weekend, referring to the administration of his communist predecessor Demetris Christofias.

Cyprus is the fifth financial rescue following those for Greece, Ireland, Portugal, and for Spanish banks, but has proved to be the most difficult to conclude.

The Christofias government tried to avoid the harsh terms of an EU bailout by asking Russia and China for bilateral loans.

But as the amount required soared, it became clear that the troika -- the European Commission, the European Central Bank and the International Monetary Fund -- was the only institution with the resources to help.

The mooted 17-billion euro ($22.2 billion) bailout figure is roughly the same as the island's total economic output, and would increase debt to more than 140 percent of gross domestic product (GDP), a level considered unmanageable in the long run.

The island's Simerini newspaper said Cyprus had been told to find seven billion euros of the 17 billion euros it needs because lending the government more than 10 billion would make the debt unserviceable.

To help fast-track an agreement, Cyprus has agreed to submit its banks to independent scrutiny to allay suspicions of money-laundering.

The concerns stem from allegations that the island is a favoured destination for the ill-gotten gains of Russian oligarchs.

An independent audit is expected to begin next week and be completed before the end of March as requested by eurogroup finance ministers.

Following the eurozone summit, Finance Minister Michalis Sarris is to fly to Moscow for talks on Monday.

On the agenda will be extending a 2.5 billion euro Russian loan payment due in 2016 and discussing how Russia could contribute to the bailout package, state radio reported.

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