EU ministers working on bailout deal for Cyprus
EUROPEAN Union finance minister are on track to agree the terms of a bailout of Cyprus before the end of this month, in a move that will finally see it become the fourth euro country to receive a bailout.
Working out a deal for Cyprus topped the agenda, but divisions remain as to how the Mediterranean island should be dealt with.
The country needs a bailout of about €17.5bn. While that is a relatively small figure, sorting out a deal has been fraught with problems.
The bailout is roughly equivalent to Cyprus's total economic output, which makes the rescue package difficult to sustain long-term.
As well as this, the country has a reputation for being a haven for money laundering by Russians and Eastern Europeans.
The International Monetary Fund (IMF) has made cleaning up the country's banking system a key condition of it contributing to a bailout.
Finance Minister Michael Noonan admitted in Brussels yesterday that hashing out a deal for Cyprus had been "difficult" but a deal is still expected before the end of this month.
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.
President Nicos Anastasiades promised last Thursday to work for a swift deal to prop up the island's banks, which need capital of €8-€10bn. The total bailout, including financing for general government operations and to finance existing debt, could be up to €17bn, equal to Cyprus's annual economic output.
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 privatisation of state assets, starting with the island's telecoms company, which could raise up to €1.5bn. Cyprus also needs to restructure the bloated banking sector, which has assets eight times larger than the island's economy.
German officials, backed by the Netherlands and Finland, have pushed for depositors in Cypriot banks, many of whom are Russian and British businesspeople, to help pay for the cost of the rescue, a process known as a "bail-in". (Additional reporting Reuters)
There are concerns in Berlin that Cyprus, with its low corporate tax rate and liquid banking system, has become a conduit for money-laundering. Russian individuals and companies have a high level of deposits in the banking sector.
But 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 2pc of total deposits was withdrawn in January, although officials say there has since been a return of capital.
Cyprus's newly appointed 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 euro zone - 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.
But Jeroen Dijsselbloem, who chairs the meetings of the finance ministers, when asked if bank depositors were safe, avoided a direct answer.
He said the details of the bailout would have to be worked out together by the International Monetary Fund, the European Central Bank and the European Commission.
"All the ... elements will have to be decided as soon as the institutions come back with a solution which is cooperative in reaching a feasible and sustainable solution to Cyprus, so all the questions of the elements will then be answered," he said.
While short on detail, the euro zone statement at least ends a dispute over whether Cyprus is important enough for the euro zone to come to its rescue - a debate started by Germany, which had said the "systemic relevance" of Cyprus was unproven.
Olli Rehn, the European commissioner for economic affairs, said over the weekend all euro zone countries were important.
"Even if you come from a big EU country, you should be aware that every member of the euro zone is systemically relevant," Rehn was quoted as saying in Der Spiegel.
"If Cyprus becomes disorderly insolvent, it is very likely that would lead to it exiting the euro zone," Rehn said.
(Additional reporting Reuters)