EU handling of Greece forced Cyprus bailout, minister says
By Honor Mahony
Cyprus has lashed out that short-sighted and German-led thinking by negotiators of Greece's bailout deal has forced the Mediterranean island into asking for euro aid that it would otherwise not have needed.
"Effectively because of our close proximity (to Greece) we were called upon to pay a very heavy price because of our financial connection," finance minister Vassos Shiarly said Friday (6 July).
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Cyprus' major complaint that holders of Greek bonds take a loss on their investment - something insisted on by German Chancellor Angela Merkel. This hit Cypriot banks - heavy lenders in Greece - hard.
"Private sector involvement initially worked around a 75 percent haircut. But effectively the total loss for any Greek sovereign bond holder was in the order of 81 percent." The total loss for Cypriot banks amounted to €4.2bn, around 24 percent of GDP .
"If you ask me whether this was a fair way to deal with it, I dare say no," said the minister, indicating that the consequences should have been "borne in mind" at the time.
According to Shiarly, if Cyprus share had been "fairly evaluated" in terms of GDP, Cypriot banks would have taken a loss of €200m. "Petty cash" these days.
The issue is to feature strongly when Cyprus starts negotiations on the terms of its bailout.
"We would like to talk to our fellow Europeans and make sure they understand the unfairness by which this particular issue has been dealt with."
Officials from the European Commission, European Central Bank and International Monetary Fund came to the island earlier this week to look at Nicosia's accounts. Negotiations on the terms of the deal and the amount - speculated to be around €10bn - will start soon.
Shiarly says that while additional funding for 2012 is not needed, "liquidity is a problem" as it is no longer possible to renew short-term treasury bills.
The finance minister also indicated that Cyprus will fight to keep its low corporate tax rate (10%), which has "substantially helped" the economy.
Here it takes comfort from bailoutee Ireland - where many similarities are drawn - whose low company levy survived the EU-IMF inspectors and was not made a part of its reform programme.
The island may also get a loan from Russia although the minister insisted that Nicosia had "never requested" a loan but only "made an enquiry." Cyprus has indicated it will juggle the two potential aid lines to secure itself the most favourable deal.
Meanwhile, providing an increasingly acknowledged backdrop to Cyprus' financial situation is the gas fields off its shores - a possibly major source of income.
The island has begun exploratory drilling and expects its first income from the large reserves by 2020.