Eurozone finance ministers pledged on Monday to agree a bailout for Cyprus by the end of this month, but details of how the rescue will be financed have yet to be sorted out.
Cyprus requested a bailout in June last year, but it was not possible to reach an agreement with the last, communist-led government. A new, conservative government took office last month and negotiations have intensified.
The “troika” of the EU, IMF and the European Central Bank (ECB) was to send a mission of experts to Cyprus yesterday for a technical analysis of the country’s financing needs and to get a better understanding of the new Cypriot government, ECB board member Joerg Asmussen said.
Cypriot President Nicos Anastasiades promised on Thursday to work for a swift deal to prop up the island’s banks, which need capital of between 8 billion and 10 billion euros (US$10.4 billion and US$13 billion). The total bailout, including financing for general government operations and to finance existing debt, could be up to 17 billion euros, equal to Cyprus’s annual economic output.
Two eurozone officials said ministers meeting in Brussels did not agree on how best to finance the bailout, but were committed to a deal by the end of this month.
“The Eurogroup called on the international institutions and Cyprus to accelerate their work on the building blocks of a program, and agreed to target political endorsement of the program around the second half of March,” the ministers said in a statement.
Removing one of the stumbling blocs for an agreement, the new Cypriot authorities had agreed to an independent review of how Cypriot banks are implementing anti-money-laundering laws, the eurozone statement said.
That is likely to appease Germany, which has raised concerns about money-laundering on the island.
The ministers examined a variety of options to finance the bailout and ensure that it is “sustainable” — that Cyprus can repay what it borrows.
One way to help that goal is privatization of state assets, starting with the island’s telecoms company, which could raise up to 1.5 billion euros. Cyprus also needs to restructure the bloated banking sector, which has assets eight times larger than the island’s 17 billion euro economy.
German officials, backed by the Netherlands and Finland, have pushed for depositors in Cypriot banks, many of whom are Russian and British business people, to help pay for the cost of the rescue, a process known as a “bail-in.”
However, Cyprus fears any “bail-in” will spark the rapid withdrawal of funds from the island and undermine its entire business model, making the economic situation even worse.
Figures released last week showed a little over 2 percent of total deposits was withdrawn in January, although officials say there has since been a return of capital.
Newly appointed Cypriot Finance Minister Michael Sarris called the bail-in idea a bad proposal.
“Really and categorically — and this doesn’t only apply in the case of Cyprus, but for the world over and the eurozone — there really couldn’t be a more stupid idea,” Sarris, a widely respected economist, told reporters last week.
He was to push that line in discussions on Monday, the head of his office said before the meeting, adding that a variety of other options were open to discussion to make a bailout viable, including an extension of a loan from Russia and the possibility of Russia taking a controlling stake in Cyprus Popular Bank, one of the hardest hit by the Greek debt crisis.
A 17 billion euro rescue would increase Cyprus’ debts to about 145 percent of GDP, a level considered unsustainable. Greece’s bailout calls for it to cut its debt-to-GDP ratio to 120 percent by 2020, but that would be too high for Cyprus.