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16th Sep 2019

Money laundering probe boosts prospect of Cyprus bailout

  • Cyprus - EU officials refused to rule out private sector bank losses (Photo: StockMonkeys.com)

The EU has moved closer to a €17.5 billion bailout for Cyprus after the Mediterranean island on Monday (4 March) agreed to audit its banks to assess implementation of anti-money-laundering rules.

Following the meeting of eurozone finance ministers, Eurogroup President Jeroen Djisselbloem said it is his "understanding" that a private company will undertake the investigation.

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But for their part, Cypriot officials have indicated it will be carried out by Moneyval, an intergovernmental group which falls under the auspices of the Council of Europe, the Strasbourg-based human rights watchdog.

Moneyval already published four positive reports on Cyprus' anti-money-laundering compliance between 1998 and 2011.

After Monday's meeting, the euro finance ministers underlined their "readiness to assist Cyprus in its adjustment effort, including of its banking sector" and to work towards "the earliest possible completion of the loan agreement."

Djisselbloem refused to be drawn on the possible contents of a rescue package.

But he said preparatory work is "well advanced" and he would seek "political endorsement of the programme in the second half of March."

Meanwhile, the government of Nikos Anastasiades, Cyprus' newly elected centre-right President, was sworn into office on 1 March, with a mandate to swiftly resolve a debt deal.

Cyprus requested an EU bailout last June, but negotiations stalled on what to do about the country's bloated banking sector, which currently holds assets worth more than €120 billion - around seven times the size of Cyprus' annual GDP.

The International Monetary Fund, one of the potential bailout lenders, is concerned that a conventional rescue would push the Cypriot debt-to-GDP ratio up to an unsustainable level of between 140 percent and 145 percent, second in size only to Greece.

Cypriot diplomats claim that their banks are clean.

But a leaked report by the German intelligence service last year said they hold billions of euros belonging to Russian investors, some of whom are linked to organised crime.

The former employers of the late Russian anti-corruption activist, Sergei Magnitsky, also claim that tens of millions of euros of Russian mafia money went through Cyprus.

In this context, Germany has insisted on private sector involvement (PSI) - losses by private bank depositors - to bring down the overall cost of the bailout package.

But some EU officials are concerned that losses for depositors would lead to a flight of capital from the island.

The European Commission has previously said PSI was used in Greece on a "unique" basis.

Cypriot banks were already among the hardest hit by the Greek haircut, losing €4.5 billion.

Economic affairs commissioner Olli Rehn last month told reporters that "the commission is not working on any PSI option for Cyprus."

Nicosia has also signalled its opposition to PSI, with Anastasiades saying that this path would "not be accepted."

But Djisselbloem on Monday refused to rule out the possibility.

Rehn the same day confirmed that Ireland would become the first eurozone country to complete its bailout programme, with return to normality due in autumn.

All 27 EU finance ministers will today (5 March) discuss whether to delay the maturity of an estimated €40 billion of Irish debt by 15 years.

Germany and ECB clash over Cyprus

The European Central Bank is at odds with Germany's finance minister over the consequences of not bailing out Cyprus and its wider implications for the eurozone.

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