Cyprus bail-out 'not excluded'

04.06.12 @ 09:25

  1. By Valentina Pop
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BRUSSELS - Cypriot officials over the weekend openly said that their country may be the fourth eurozone state in line for a bail-out due to exposure to Greece.

  • Nicosia by night: the divided capital may soon have to face troika inspectors (Photo: Kyriakos)

Meanwhile, Germany is reportedly pressing Spain to accept a euro-bail-out for its banks.

Cyprus central bank governor Panicos Demetriades told the Financial Times on Sunday (3 June) that a bail-out is getting "less unlikely" by the end of the month, when a €1.8 billion deadline for saving the country's second largest bank falls due.

Similar comments were made on Friday by Cypriot president Demetrias Christofias, during a press conference: "I don't take as a given that we will negotiate entry to a support mechanism, [but] I don't want to absolutely exclude it."

Until now Cyprus maintained it did not need any EU funding as it took a €2.5 billion loan from Russia last year when its rating was downgraded to "junk," meaning it cannot borrow from the markets at sustainable rates.

The country's banks were hit badly by the Greek crisis, as they lost more than €3 billion in the "voluntary" debt write-down for Greece. Cypriot banks still have another €22 billion in outstanding loans to Greek customers. Cyprus' own GDP, by comparison, is just €18 billion.

If Cyprus asks for a full-blown bail-out like Greece, Portugal and Ireland, it would become the first eurozone country to lead the EU presidency under a considerable loss of sovereignty, with troika inspectors due in Nicosia every few weeks to monitor the implementation of an austerity programme that would accompany the rescue package.

Cyprus is due to take over the day-to-day chairing of ministers meetings on 1 July and to try to seal agreement on the EU's next seven-year budget. It will already will mark a first among EU presidencies as it has a frozen conflict on its territory, foreign military bases and a Berlin-style wall dividing the capital, Nicosia.

Close ties with Russian and Ukrainian oligarchs add to the mix. Cyprus is one of the preferred destinations for offshore schemes designed to blur the ownership of luxury yachts, villas and cars of the post-Soviet elite.

The Cypriot government still hopes to avoid a full-blown bail-out, as any outside funding would be mainly destined to prop up the country's troubled banks.

"There are support mechanisms and support mechanisms. There is a support mechanism for banks, which does not imply what happened to Greece," Christofias said, in reference to the harsh austerity measures accompanying the Greek bail-out.

A Greek euro-exit would lead to a "chaotic situation," the Cypriot leader addded.

The same day, Moody's ratings agency lowered Greece's rank even further based on the "increased risk" of an exit from the common currency.

French finance minister Pierre Moscovici on Sunday said the country would have to leave the eurozone if it did not respect bail-out conditions.

The Greek radical left, a potential winner in the 17 June elections, had been hoping to get support from the new Socialist administration in Paris for its plans to cancel the bail-out if they come to power.

But Moscovici told French television that the radical left's position "poses a problem."

Spain

Meanwhile, the Spanish government is coming under increased German pressure to ask for a bail-out from the European Financial Stability Facility (EFSF) for its troubled banks, the Financial Times Deutschland reported.

Madrid has so far said it would be able to avoid this scenario and instead has asked for direct funding either via the European Central Bank or the EFSF.

Current rules forbid the EFSF to bail out banks directly. Spain argues this is a flaw in the design of the bail-out fund, as it forces governments to take on more debt, instead of solving the problem itself.

But the government's own front seems to be crumbling.

"A bail-out would not be the apocalypse," Jose Maria Beneyto, an MP from the ruling Popular Party as premier Mariano Rajoy said on Friday.

"You have to live with it. We have got to escape this or we'll go mad worrying about bonds spreads," he added, noting that Portugal and Ireland have been living with the troika-imposed programmes "relatively passively."