More Bailouts: Cyprus' turn...
Tuesday, 05 March 2013

Euro zone finance ministers pledged on Monday to agree a bailout for Cyprus by the end of March, but details of how the rescue will be financed are yet to be sorted out, Reuters reports.


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 European Union, International Monetary Fund and the European Central Bank would send a mission of experts to Cyprus on Tuesday 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.


President Nicos Anastasiades promised on Thursday to work for a swift deal to prop up the island's banks, which need capital of 8-10 billion euros. 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 euro zone 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 March.

"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 euro zone 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".

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 2 percent 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.


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