Analysis

German musings: Is Cyprus too small for a bailout?

30.01.13 @ 17:40

  1. By Valentina Pop
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BERLIN - German politicians have a jaundiced view of Cyprus. Apart from associating it with money laundering and tax dumping, they are now wondering whether it is big enough to be worth bailing out.

  • (Photo: Domiriel)

The new catchphase is "systemically relevant" or whether a country's financial problems are large enough to pose a risk to the eurozone as a whole.

"Negotiating tactics", say EU diplomats. "Legal precondition," counters the German government. According to the legal base governing the eurozone bailout fund (ESM), any bailout request is to be assessed for "the existence of a risk to the financial stability of the euro area as a whole or of its member states."

The European Central Bank's position is that even if in normal times, a tiny country like Cyprus would not pose any "systemic" risk to the eurozone, the opposite could now be the case. Greece, barely stabilised after a long delay last year, could also face new troubles as the Cypriot banking system is mostly active in Greece.

If allowed to go bust, so the thinking goes in the ECB, Cyprus could become Europe's new Lehman Brothers - the bankrupt investment bank that collapsed at the outset of the financial crisis in 2008.

The German government is less convinced this is the case. The government is not advocating a Cyprus exit from the euro, says a German source. But the case has to be rock solid for it to pass through a hostile parliament, where the opposition and backbenchers in Chancellor Merkel's coalition have already threatened to derail it.

"There is a situation here that is different from the rest of the [bailout] programmes that passed through the Bundestag so far: it's the upcoming elections in September. It was always important to make a very good case, but now even more so because the Social Democrats are threatening to derail it," the source said.

The suspicion that Cyprus is a tax haven where dodgy Russian oligarchs hide their wealth makes it an even harder case to sell to the Bundestag. A thorough review by the troika inspectors - EU commission, ECB and International Monetary Fund - of these matters is just as important as ensuring the country will pay back its debt in the next few years.

Contributions from Russia, but also the UK, Lebanon or Israel would be "most welcome," says Berlin. Russian Prime Minister Dmitry Medvedev said last week in Davos he was "open" to the idea of extending the repayment deadlines for a €2.5 billion bailout Cyprus already received from Moscow. This would help lower the country's debt, which is to reach almost 170 percent of GDP were it to get the suggested bailout of €17 billion.

"President Putin assured me that the Russian Federation is ready to contribute along with the European Union in loan deal for Cyprus," outgoing Cypriot president Christofias said Wednesday in a press conference.

The Communist leader, who called Putin an "old friend", is stepping down next month at the end of his second term. Christofias has been one of the reasons the Cypriot bailout is being delayed. He is refusing to agree to any privatisations in exchange for the eurozone loans.

Eurozone finance ministers are likely to agree on a deal in March, after presidential elections take place on 17 and 24 February. But that will be only the first step before seeking parliamentary approval in Germany. And the Bundestag may still consider that Cyprus is too small and not 'clean' enough to be worth bailing out.

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