• Classical-era ruins on Cypriot coastline: its banks may need up to €17 billion to survive (Photo: jnocca93)

German opposition threatens EU aid for Cyprus

09.01.13 @ 09:58

  1. By Andrew Rettman
  2. Andrew email

BRUSSELS - German opposition leader Sigmar Gabriel has said he will try to block an EU-Cyprus bailout unless Cyprus cleans up its banking sector.

Speaking in German newspaper Sueddeutsche Zeitung on Wednesday (9 January), the centre-left SPD party chief said: "At present we do not [agree to the rescue package]. I cannot imagine that German taxpayers will save Cypriot banks whose business model is based on allowing tax fraud."

He added: "If [German Chancellor] Mrs Merkel wants SPD approval for the Cyprus package, she will have to have very good reasons. But I do not see these at present."

Eurozone finance ministers are currently waiting for a report by US-based consultancy firm Pimco on the long term health of Cypriot banks.

Cyprus expects them to agree a draft memorandum of understanding on the bailout - worth up to €17 billion - at a meeting in Brussels on 21 January and to formally approve the measures on 10 February.

But under German law, its finance chief, Wolfgang Schauble, must get parliamentary approval before signing a legally binding agreement in the EU's Luxembourg-based bailout fund, the ESM.

Gabriel's SPD party controls just 146 out of 622 seats in the Bundestag.

But according to Sueddeutsche Zeitung, Merkel's majority is under serious threat.

In addition to the SPD, Green deputies also have ethical reservations on Cyprus, while over 20 MPs in Merkel's ruling coalition oppose her euro policies on principle.

The debate comes after a leaked German intelligence report last year said Cyprus is a haven for Russian tax evaders and organised crime.

An EU diplomat told this website that December's draft of the bailout memorandum already stipulated "a number of conditions about transparency in the [Cypriot] financial sector."

He added: "I expect the final version of the memo to deal with these topics as well."

Meanwhile, Cyprus is mobilising its top officials to tell EU colleagues that its banks do not do anything wrong.

On Monday, the head of the Cypriot central bank, Panicos Demetriades, met with eurozone countries' ambassadors in Nicosia.

A follow-up meeting with Cypriot finance minister Vassos Shiarly is planned for this week or next week.

"[Demetriades] explained all the issues about money laundering - that the problem does not exist. He showed them reports by all the relevant bodies, such as the OECD [a Paris-based economic club], and he explained how the system works. A lot of people talk about this subject without really knowing the facts," a Cypriot spokesman, Nikos Christodoulides, told EUobserver.

He added that Russia might also be invited to contribute money if there is an EU bailout.

"First there must be an EU agreement, then we might ask them [Russia] to join," he said.

But for some, Russian input is not welcome.

Cyprus' anti-money-laundering body, Mokas, is currently investigating whether Cypriot banks were used to launder over €20 million of stolen money for Russian officials linked to the killing of anti-corruption activist Sergei Magnitsky in 2009.

Magnitsky's former employer, the UK-based investment firm Hermitage Capital, believes that Russian cash might be used to quash the probe.

"[Russian President] Putin is absolutely terrified of anyone lifting the lid on Cyprus and is willing to spend any amount of government money to make sure that doesn't happen," Hermitage Capital chief Bill Browder said.