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Cyprus Rebuffs EU Over Bailout

by Ulrika Lomas,, Brussels

13 July 2012

Cyprus has underscored that it will not accept punitive conditions in exchange for a financial assistance package from European Union member states, arguing that the bailout of Greece was poorly executed and over-burdened the Cypriot banking sector, which itself now needs substantial bailout funds.

At a heated joint press conference with Jose Manuel Barroso, the head of the European Commission, Cypriot Finance Minister, Vassos Shiarly criticized Brussels's management of the European bailout of Greece as unfair on Cyprus. He highlighted that the Cypriot banking sector, with its close financial connections to Greece, had been asked to shoulder some EUR4.2bn (USD5.1bn) in writedowns, equal to a quarter of the economy's Gross Domestic Product. He argued that if Greek financial sector losses had been shared among European nations on the basis of the size of their economies, the cost to the Cypriot banking sector would have been some fifty times lower and the nation would not now be enquiring about financial assistance.

Cyprus this month initiated financial assistance talks with the troika of lenders, comprising of the European Central Bank, the European Commission and the International Monetary Fund. An assessment of Cyprus's financial needs is ongoing, with a decision on terms for a financial assistance package to be announced by the end of the month.

Shiarly, who earlier stressed that Cyprus would not budge on various areas of its fiscal policy, in particular the island's corporate tax rate and public sector wages, has said that the provision of financial assistance should be seen on a separate basis than earlier bailouts of European nations, in recognition that the Greek bailout contributed to Cyprus's 'junk' credit rating, preventing the nation from externally servicing its debt.

Shiarly took flak from Barroso at the conference for approaching Russia on the possibility of securing EUR5bn in new finance, under a deal that would involve fewer conditions and weaken Europe's influence over Cypriot fiscal policy. Shiarly said that Cyprus had only submitted an enquiry to the troika on financial assistance and had not requested a bailout. He also noted that Ireland too had received external support in its bailout, from the United Kingdom and Sweden.

Confirmation that Cyprus will require a bailout comes despite reassurances that the nation would be able to overcome political division and implement deep structural reforms, to reduce the significant deficit in two successive steps, from a deficit that topped 7% of gross domestic product (GDP) at the start of this year, to 2.5%-2.7% of GDP in 2012, and to 0.5% of GDP in 2013.

The government managed to obtain EUR2.5bn in credit from Russia in 2011 to finance state debt and resist a European bailout that year. However the government has failed to find domestic sources of credit to refinance the nation's second largest financial institution, Cyprus Popular Bank, which reportedly requires an injection of funds worth at least EUR1.8bn, but may require as much as EUR4bn, equal to around 23% of Cyprus' GDP, according to estimates from Fitch Ratings.

Shiarly has conceded however that the bailout would not be limited to support for the banking sector, as the Cypriot economy has significantly weakened this year, undermining austerity measures introduced in 2011 and 2012, designed to rapidly cut the deficit. It is anticipated that Cyprus may need to secure EUR10bn in rescue funds.

TAGS: Russia | tax | economics | European Commission | fiscal policy | banking | international financial centres (IFC) | International Monetary Fund (IMF) | offshore | offshore banking | Cyprus | Greece | European Union (EU) | Europe

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