Cyprus appeared to win conditional support for its bailout bid from EU paymaster Germany on Friday, hours after a savage credit ratings cut intensified the indebted island’s economic misery.
Rating agency Moody’s slashed Cyprus by three notches to “Caa3” late on Wednesday, taking it further into “junk” territory and warned it could be downgraded again.
It predicted the country’s debt pile would continue to rise because of the capital needs of its banks, burned by their exposure to crisis-wrecked Greece and said it saw an even chance of default.
Germany, wary at the prospect of bailing out a country it says must improve financial transparency, nonetheless said EU members must stand by each other.
“Cyprus must move forward with its own obligations and reforms to the economy but at the same time we must show solidarity,” German Chancellor Angela Merkel told reporters as she arrived in Cyprus for talks with other conservative politicians.
She said that was a fundamental EU principle.
Cyprus, one of the bloc’s smallest economies, applied for a financial rescue in June last year after its banks suffered huge losses on the EU-approved writedown on Greece’s debt, and is expected to be the fourth recipient of a eurozone bailout.
“The challenges are really huge, but I am sure if and when the country can get a new and strong and committed leadership capable of strengthening confidence ... it will have a tremendous positive impact,” Finnish Prime Minister Jyrki Katainen said on Friday.
The comments were a boost for Cypriot opposition leader Nicos Anastasiades, who is a frontrunner to win parliamentary elections on Feb. 17.
Anastasiades, who leads the right-wing Democratic Rally party, was hosting a meeting on the island of the European People’s Party, an EU-wide group.
He told reporters on Thursday he was committed to meeting the terms of any international aid package.
A potential rescue bill of 17 billion euros (US$22.7 billion), roughly equivalent to its entire economic output, has deepened concerns among EU partners about Cyprus’s debts, and some doubt it would be able to repay the aid without more concessions from lenders.
Germany has expressed unease about channeling taxpayers’ money into a country seen by some as a hub for money laundering. Cyprus, a popular tax haven for wealthy Russians, says it fully complies with international rules against money laundering.
Debt restructuring has been ruled out as an option by both Nicosia and Brussels, with European Economic and Monetary Affairs Commissioner Olli Rehn quoted as saying on Friday that a “haircut” was not under consideration.
Reacting on Friday to the Moody’s downgrade, Cyprus’ Minister of Finance Vassos Shiarly said he wanted to focus on the positive, saying he looked forward to the conclusion of a bailout deal.
“A conclusion on a memorandum of understanding does improve the prospects,” he told state radio.