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Cyprus may need more than €10 billion for bailout

The island’s’ public finances are in a worse state than we expected said troika official Maarten Verwey according to the minutes of the meeting obtained by Bloomberg News; more bailout cash may be needed.

CYPRUS may need more than the 10 billion Euros ($12.4 billion) staffers have estimated for a financial lifeline after bigger shortfalls than anticipated were found on the government’s balance sheet, according to the minutes of a meeting of international and Cypriot officials.

A mission of officials from the European Commission, European Central Bank and the IMF, the so-called troika, met with Cypriot lawmakers on July 27 to present findings from their analysis of the country’s economy. On June 25, Cyprus became the fifth of the euro area’s 17 member states to seek external aid.

“Your public finances are in a worse shape than we expected,” Maarten Verwey, a troika official and a deputy head of the commission’s Directorate General for Economic and Financial Affairs, said according to the minutes of the meeting obtained by Bloomberg News. “It is clear you have problems in your banking sector. It is not just the major banks in Cyprus, but the problems affect the entire banking sector.”

Euro-area finance ministers approved the bailout request from Cyprus on June 27. No amount was specified for the rescue, which will encompass the public sector as well as banks. Cyprus also sought assistance from the IMF and Russia.

‘Further Economic Cooperation’

Cypriot banks lost more than 4 billion Euros in Greece’s debt restructuring earlier this year. The government had to rescue the island’s second-largest lender, Cyprus Popular Bank Pcl, in May by underwriting a 1.8 billion-euro capital increase. On June 27, Bank of Cyprus Pcl requested 500 million Euros in temporary aid to meet regulatory requirements.

Russian President Vladimir Putin and his Cypriot counterpart, Demetris Christofias, discussed “further economic cooperation” between the two countries during a phone conversation today, the Cypriot government said in an e-mailed statement.

Christos Christofides, a government spokesman, declined to say if the two leaders discussed Cyprus’s request for a 5 billion Euro loan.

Mainly Russian non-residents hold one of every two Euros deposited at Cypriot banks, directly or indirectly, according to Theo Parperis, chairman of the Institute of Certified Public Accountants of Cyprus.

Budget Deficit

The EU’s Verwey declined to speculate on how much assistance Cyprus may require in the troika’s meeting with lawmakers, according to the minutes, which were verified by two officials involved in the talks. The officials declined to be identified because the meeting was private.

Spokespeople for the commission and the ECB couldn’t be reached immediately for comment.

Cyprus could return to financial markets after it tackles its budget deficit and structural reforms, the troika said. The government needs to trim its payroll and spending on social programs, overhaul the pension system and wage indexation and enhance supervision of banks, according to the minutes.

The Cypriot government intends to narrow its budget deficit to as little as 2.5 percent of gross domestic product this year from 6.3 percent in 2011.

The Cypriot economy, which has contracted for three straight quarters, will see a “deep recession” continue into 2013, Verwey said. [Bloomberg]

Readers' comments

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  • Odd_Job_Bob says:

    Steve, all you say is correct, but you’re sitting on the fence! What’s your estimate/bet?

    Go on, show us the money (for ONLY the requested and amount to be granted bailout)!

  • Steve says:

    The amount of money for Cyprus to be bailed out depends on what debts are included or not included. The state is broke, it is already defaulting on payments to providers of goods and services and is raiding the parastatal companies for cash.

    The borrowings made by Cyprus, such as the billions from Russia have to be paid back or the Cyprus credit rating will be at rockbottom, so looking forward a few years already increases the amount required. Then the repair of the non-performing bank mortgages will include an amount for the forced sales of mortgaged properties by the banks, as already foreseen by the Troika, but how much will that bring in is anybody’s guess. If public opinion some other influence forces a change of mind on the latter, then pensions, taxes, civil service staffing, etc., are going to face even more painful realities that the government doesn’t have the will or the wit to implement.

    Then there are the side – issues the Troika will pick up on. For example, the 50% of bank deposits owned by a tiny minority, Russian NON RESIDENTS, suggests two things to me; money laundering and tax evasion. Without the profits from these deposits, the banks would be in an even worse mess.

    One thing we can be sure of; things will get much worse before they get better.

  • @sam – I think you meant to say “bloated public sector”?

  • sam london says:

    Cyprus will be in a real mess once Greece is kicked out of the euro by the end of the year. Everyone I know is planning holidays there next year with the re-introduction of the Drachma, as everything will be so cheap. Without tourism what will pay Cyprus’ bloated private sector. Get ready for street disorder in Cyprus as cuts kick in, I’m off to Greece.

  • Costas Apacket says:

    O-J-B don’t get miffed, get evens!

  • Odd_Job_Bob says:

    I’m officially extremely miffed now. For ages I’ve been playing this “how deep is the deficit” game and NO-ONE has wanted to play.

    Now, all of a sudden, everyone is placing bets!

    Still, might as well restate mine (as hopefully, with the odds I got at the time, I can sell my option freeing up capital for another venture into the market): €20bn in bailout request, real need the MAJORITY of the Cyprus banking system’s €153bn lending book.

    Double or quits anyone?

  • MARTYN says:

    Right with you on this Jim, obviously the ‘trickle’ technique is being deployed. Any advance on 13.5bn anyone?

  • Mike says:

    “Mainly Russian non-residents hold one of every two Euros deposited at Cypriot banks, directly or indirectly, according to Theo Parperis, chairman of the Institute of Certified Public Accountants of Cyprus”.

    Is that healthy? I consider that to be bordering on prostituting or selling out the Country. It is not beyond the realms of possibility that we may even see the North as a province of Turkey and the South as a province of Russia. Where then Cyprus? When Russia gets bored or when global financial rules return to 70’s and early 80’s regulatory levels it may even hand the whole of the Island to Turkey to administer.

    As for “The Cypriot government intends to narrow its budget deficit to as little as 2.5 percent of gross domestic product this year from 6.3 percent in 2011”. Well it would certainly be an noble and notable achievement – but how? Words it would appear come cheaply on this Island of dreams – shattered or otherwise!

  • Costas Apacket says:

    €15 to €20 Billion is my guess.

    Anyone care to raise or twist?

  • Jim says:

    I believe the true figure will be more than 10 Billion Euros. This leak is just paving the way for even more bad news.

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