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January 20, 2013 4:26 pm
The long-delayed bailout of Cyprus is set to be pushed back at least two more months amid mounting disagreement over how to bring down the cost to a manageable level for the debt-laden government.
Although fears Cyprus would run out of cash have dissipated after it tapped previously off-limits cash reserves and Russia showed willingness to delay repayment on a €2.5bn loan, officials said the delay until late March would push Nicosia to the edge of its ability to fund government and banking operations.
Publicly, Cypriot leaders said the delay was due to a protracted review of its teetering banking sector’s capital needs, which California-based investment group Pimco began in September.
But EU officials said deeper strains were emerging, including within the “troika” of international lenders. The International Monetary Fund was insisting on significant amounts of debt relief before it agreed to participate in the programme, the officials said.
And Germany is not satisfied that enough has been done to curb Russian money-laundering in the Cypriot banking system. In addition, EU leaders, particularly Angela Merkel, the German chancellor, no longer view Demetris Christofias, Cyprus’s Communist president, as a credible negotiator.
They have decided to wait until after next month’s elections, expected to be won by Nicos Anastasiades of the centre-right Democratic Rally party, before resuming talks.
“We are all quite fed up with Christofias’s lack of willingness to accept the reality of the situation,” said one senior official involved in the talks.
Eurozone finance ministers are expected to go along with the delay at a meeting on Monday in Brussels, where bailout negotiators will detail the stand-off.
Cyprus’s sovereign debt already stands close to 90 per cent of economic output and officials estimate the bailout will amount to about €16bn, nearly doubling Nicosia’s debt load and making it second only to Greece’s in the eurozone. Some €10bn of the total will go to recapitalising Cypriot banks, which suffered huge losses from Greece’s sovereign debt default last year.
The IMF considers such debt levels unsustainable. While it has been able to give Athens some leeway because Greece’s collapse could have systemic effects, the fund’s officials do not view Cyprus as a systemic risk.
Some officials involved in the talks believe sufficient debt relief is impossible without either restructuring Cypriot sovereign debt – which EU leaders have vowed not to repeat following Greece’s default – or forcing losses on almost all creditors of Cypriot banks, including deposit holders with above the €100,000 guaranteed under EU-wide rules.
In addition to the IMF, several northern eurozone countries, including Germany and Finland, are pushing hard for a sweeping “bail-in” of bank creditors.
Top officials in the European Commission and the European Central Bank, the two EU representatives on the troika, are resisting drastic bank measures out of fear it could panic senior bondholders and deposit holders elsewhere, especially in Spain, where confidence in the financial sector remains tenuous.
Neither depositors nor senior bondholders were forced to take losses in Ireland’s or Spain’s bank bailout. “They are taking it to the extremes; they’re taking a rather fundamentalist position,” said one official of the IMF camp. “Cyprus is not as systemic as Greece, but it is still systemic.”
Another top eurozone official involved said he believed some of the hardening of positions was tactical. “It’s partially a negotiating stance to frighten the other side,” said the official. “Depositors will not be bailed in.”
Nicosia recently asked asset manager BlackRock to review Pimco’s report on the Cypriot banks, a review Cypriot officials acknowledge was done in hope of lowering the estimate of banks’ capital needs. EU officials said, however, BlackRock was expected to show little revision to Pimco’s original €10bn-€12bn estimate.
Without a lower price tag for banks, EU officials have been pushing hard for a sweeping privatisation programme, which negotiators believe could bring in as much as €2bn. Mr Christofias has resisted privatisations, however, helping force the delay.
“He will not countenance any privatisation on his watch,” said an EU official. “Without privatisation, no programme.”
Negotiators seeking to find a compromise said they believed privatisations combined with a more limited writedown for bank creditors might be enough to bring Cypriot debt to sustainable levels, but Berlin was expected to push for more wide-ranging options from the troika.
Additional reporting by Quentin Peel in Berlin
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