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Cyprus bids for EU bank bailout

Cyprus has become the fifth Eurozone country that has turned to Brussels for emergency funding. It is seeking a lifeline for its banks and its budget, hours after Spain submitted a formal request to bail out its banks.

CYPRUS said on Monday it was applying to Brussels for a bailout, both for its banking sector hit by exposure to Greece and for its budget deficit, making it the fifth euro zone country to turn to the bloc’s rescue funds for help.

Tiny Cyprus has just four days left to raise at least 1.8 billion euros – equivalent to about 10 percent of its domestic output – to meet a deadline set by European regulators to recapitalize Cyprus Popular Bank, its second largest lender which saw its balance sheet hurt by bad Greek debt.

Finance Minister Vassos Shiarly said the country would also seek enough money to help with its budget deficit. The full amount would be decided over the course of weeks.

“The amount will be as much as it may be needed to cover the recapitalization and fiscal requirements,” he told Reuters. “These will be established after careful review during the next few weeks.”

The announcement means Cyprus would follow Greece, Ireland, Portugal and Spain into the arms of the emergency rescue funds set up for the 17-member euro currency zone.

Jean-Claude Juncker, head of the Eurogroup of euro zone leaders, said Cyprus would have to negotiate aid conditions with the EU and European Central Bank.

“This will include measures that will address the main challenges of the Cyprus economy, primarily those of the financial sector, and I expect that Cyprus will engage with strong determination in the required policy actions,” he said.

With its coffers emptying rapidly and hurtling towards an immovable deadline, the island suffered a further sovereign credit rating cut on Monday by Fitch, to the non-investment, or junk, BB+ grade. Cyprus has already been shut out from raising new funds on capital markets, with yields on its existing bonds well into double digits.

Cypriot officials said the bailout request did not specify how much they need from their EU partners.

An island with just 1 million residents, Cyprus has a disproportionately large financial sector that is heavily exposed to Greece, a neighbour more than 10 times the size with which it shares a language, culture and close political links.

A government statement said: “The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spillover effects through its financial sector, due to its large exposure in the Greek economy.”

Russia & China?

With a bailout widely viewed as all but inevitable, Cyprus has for weeks been trying to juggle its options between a bailout from Europe’s rescue funds – the temporary EFSF and the permanent ESM – or a bilateral loan from either Russia or China.

Cypriot President Demetris Christofias was scheduled to brief political leaders on Tuesday afternoon, a statement from the presidency said. The EU’s only Communist leader, Christofias has been reluctant to accept the fiscal and regulatory conditions that might be attached to a European rescue.

As late as this weekend, trips by government officials to China suggested Cyprus was still holding out hope for a bilateral loan from a third country. On Friday night Christofias spoke of “trying to avoid” the mechanism.

Commerce, Industry and Tourism Minister Neoklis Sylikiotis was dispatched to China, where talks were focused on a loan or a Chinese investment in the troubled Cyprus Popular Bank.

“We have had some contacts… We have requested an answer in coming days,” Sylikiotis said in comments to the state broadcaster hours before the government said it would be applying to the EU.

Moscow already provided Cyprus with 2.5 billion euros in a bilateral loan last year and has an interest in maintaining Cyprus as an offshore financial centre with low tax rates for Russian businessmen, who use it as a base to reinvest in Russia.

However, seeking such large sums from Moscow or Beijing is controversial in Cyprus, where EU membership is a matter of national pride. It could be embarrassing for Brussels as well, as Cyprus assumes the bloc’s rotating presidency on July 1.

Protective of tax

Cyprus is fiercely protective of a corporate tax rate that is one of the lowest in the EU, and eight months before a general election shows no appetite for the stringent spending cuts likely to be demanded in return for EU funding.

Christofias has repeatedly said any economic measures would not further impact “the workers”.

The European Commission has repeatedly urged Cyprus to take measures to cut its deficit below 3.0 percent and increase the competitiveness of the economy. The government says it is in the process of implementing such steps and targets a deficit of about 2.5 percent of GDP this year.

“The main source of concern is the bank recapitalization, but given that the European Commission is coming out quite strongly about excessive imbalances in the Cypriot economy one would expect them to look at that too,” said Michalis Florentiades, head of economic research at Hellenic Bank.

Cyprus Popular needs a capital infusion urgently to satisfy regulators after writing off the value of Greek government bonds in a sovereign debt swap earlier this year.

In its report, Fitch said the recapitalization bill for Cypriot banks could potentially reach 4 billion euros. That amount, equivalent to 23 percent of GDP, would also take into account rising non-performing loans from the domestic market.

Reuters

Readers' comments

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  • Jill says:

    It just gets more ridiculous doesn’t it? No-one here pays taxes,(developers, etc), over 100,000 of us waiting for title deeds which would bring in millions. Can’t get them because the developers haven’t repaid mortgages/taxes, banks are failing because developers haven’t repaid mortgages…..So now the Government (which could, of course, have enforced the above but haven’t) go to the EU for yet another bailout which, of course, it won’t pay back….and so it goes on…..

  • Odd_Job_Bob says:

    Denton, Good point well made.

    Would love to have ANY EVIDENCE WHATSOEVER, but sadly don’t have. We can just wait and see how things pan out, but already with everyone and their dog piling pressure on Germany to bail everyone out, but with Merkel stating, quite dramatically, that Eurobonds will not occur in her LIFETIME, things can only go in one direction.

    Question: one year ago, would you have heard ANYONE IN THE WHOLE EUROZONE asking for Germany to basically take over the running of their economy? However, we’re hearing lots of people (enormously erroneously, I believe) pleading for just that.

    As clever as we, the subscribers to this forum, are, do we really believe that the major players in this long saga have got it all wrong and we are in completely unexpected waters, especially when there are many of the real crystal-ball gazers (whose views I just nick!) who’ve been pretty much predicting what’s now transpiring for approx 15 years?

    A few years ago, my daughter took part in a kids experiment for TV. There was a box with chocolate cake in it and the children were told not to touch it. The experiment was to see, when no adult was looking, how many would dip into the “cookie jar” and then lie about it. Unsurprisingly, the usual suspects did. No difference here.

  • It has now emerged that the Bank of Cyprus needs €500 million to cover the capital demands of the European Banking Authority.

  • Denton Mackrell says:

    @Odd Job. Interesting story. But ‘Conspiracy theories and all that stuff aside’? Your story IS a conspiracy theory!!

  • Odd_Job_Bob says:

    Brownlow, it’s absolutely fitting that Cyprus takes over the EU presidency!

    As you probably all would have read by now, yesterday, the French “discovered” a €7 – €10bn “hole” in their finances!

    The whole corrupt and ridiculous edifice is finally crashing to the floor!

    Or, is it?

    Conspiracy theories and all that stuff aside, let’s imagine a world in which the top chaps in Europe (Merkel, Bundesbank etc) are NOT thick.

    They (or more likely, their predecessors’ predecessors) have a conundrum: How do we get all of Europe united and governable by the only people we can trust (us!)?

    We’ve tried it militarily (twice). Didn’t work. If we try it financially, where WE make all the rules, people will be crying out injustice, Germany wants to dominate everyone etc etc. We need to figure out a way for these lesser peoples to WANT us to take over their budgets, take over their governments, effectively voluntarily to cede over ALL power to us! This way, we’ll be seen as SAVIOURS and not just another conquering dictator etc.

    Solution: Let’s say we set up a project that is structurally flawed (no lender of last resort, no central control over individual budgets so countries can spend what they want and no-one will guarantee that their debts will be paid). We can say that there are strict entrance criteria, but we can waive those whenever someone wants to join. We can have lots of laws, but never enforce any of them. End result: a huge, corrupt, bankrupt mess.

    The French, the Greeks, the Spanish, Italians, Irish, Portuguese, the Brits, even the goddam Americans all clamouring for Germany to take over by putting its hands into its very deep pockets, while simultaneously stripping everyone else of any vestige of power (although the Brits and the Americans won’t be under direct rule from Berlin, so we’re really being a bit mischievous). How is this situation different from 1940 (apart from less dead people)?

    And here we are folks…

  • Costas Apacket says:

    The guano has now reached the face of the fan, so please retire to a safe distance and watch the tragedy unfold before your very eyes.

  • Steve says:

    So now we are getting closer to the real truth – €10 billion.

    Just to add, maybe this is a negotiating ploy to get the Chinese or Russians to offer a better deal. I would be amazed if Mr Christofias allows the IMF to come in and set an austerity plan for Cyprus. He would be finished, along with a lot of his party.

    The government of Cyprus has known the financial situation for a long time, including the bad news that we are just finding out. At the eleventh hour, there is still some uncertainty about whether a bailout or a third party deal will be arranged or Russia. The choice has everything to do with the unpleasant consequences of a Euro zone bail-out. The recent Financial Mirror article mentioned tax changes, but there are many others, such as cutting the bloated Civil Service numbers and public sector pensions, increasing the retirement age and getting other aspects of government spending back under control.

    All these will amount to a long spell in the political wilderness for the government, so they have procrastinated and consequently allowed the situation to worsen to the point where the austerity measures will be as severe as in Greece, or maybe more so.

  • Brown low says:

    I never thought I would see the day when the insane would be asked to run the madhouse, but now Cyprus to run the EU for six months?

  • @All

    Earlier today (Tuesday) European officials stated that Cyprus will probably need up to €10 billion from the EU.

    “The exact amount has not been decided yet. It was estimated that it would reach €6 billion for the state funding and €2 billion for the banks, but this is optimistic. It is much more likely that assistance will reach €7 billion for the state and €3 billion for the banks”, a European official said.

    A second official confirmed that assistance might reach €10 billion.

    Fitch Ratings expects that the capital needs of the banks might reach €6 billion.

    The state’s finance needs for the next two years stand at €3-4 billion.

  • John Swift says:

    What do you call a country that had it all and blew it? Cyprus.

  • Pete says:

    Unfortunately UBoat, that’s almost what happened to our developer; except that instead of having him in court or contacting his guarantors, the bank gave him more money – a lot more!

    The consequence now is that he’s gone bust and the bank claims our homes are company collateral and want to sell them.

  • UBoat says:

    I don’t think the Cypriot government care. They just see free money like Greece had and say “Let’s have some of that” after all Greece wont pay it back and has already defaulted on previous agreements.

    I wish I could go to my bank and borrow a large sum of money and then 6 months later go back and say I cant afford to repay this I will give you back less than half.

    They will have me in court before I reached the exit…..

  • John Harris says:

    The application for an EU bailout is good news; it is the only mechanism for Cyprus to regain its credibility since tinkering with public finances will no longer be possible if the eurozone will survive and with it the growth and recovery of the EU’s economy.

    The EU will surely want to look at issues which the government desperately tried to avoid. The idea that Cyprus can borrow from China or Russia for its fiscal imbalances without conditions and to borrow from the EFSF for the recap of Laiki was rejected at least week’s meeting if one reads between the lines the minister’s comments.

    The banks in Cyprus will require much more than the €1.8 billion since forbearance of loans has been widely used in Cyprus just as in Spain. Hence the financial sector will be secured and the measures the government will have to take will be in line with the EU’s recommendations.

    Moreover, if the fiscal union goes ahead the new government in Cyprus will have to seriously consider where the savings will come; one guess so get ready for a stormy 2013. The economic outlook is clouded by what will happen to Greece but having the bailout will shelter Cyprus from the risks lurking.

    The mechanism, which was anathema to most politicians, will probably be saving the economy from sinking further so egg on the face of those politicians who were forecasting catastrophe. Do they care?

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