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Angela Merkel, bailout, banking sector, Cyprus, Debt crisis, downgrade, economy, German Chancellor, Germany

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German Chancellor Angela Merkel with DISY leader Nicos Anastasiades

CYPRUS appeared to win conditional support for its bailout bid from EU paymaster Germany yesterday, hours after a savage credit ratings cut intensified the indebted island's economic misery.
Germany, wary at the prospect of bailing out a country it says must improve financial transparency, nonetheless said European Union members must stand by each other.
"Cyprus must move forward with its own obligations and reforms to the economy but at the same time we must show solidarity," German Chancellor Angela Merkel told reporters as she arrived on the island for talks with other conservative politicians, members of the European People’s Party. She said that was a fundamental EU principle.
The chancellor’s comment provided some relief for Cyprus, which earlier saw Moody’s ratings agency pushing the island further into ‘junk’ territory.
Late on Thursday, Moody's slashed Cyprus by three notches to Caa3, with a negative outlook, predicting the country's debt pile would continue to rise because of the capital needs of its banks, and said it saw an even chance of default.
Moody’s said there was also a chance of a haircut – that option however was ruled out by Brussels.
"A haircut is not an option for us," said Olli Rehn, the European Economic and Monetary Affairs Commissioner yesterday.
A potential rescue bill of €17 billion, roughly equivalent to its entire economic output, has deepened concerns among EU partners about Cyprus’ debts, and some doubt it would be able to repay the aid without more concessions from lenders.
The total amount hinges on an asset review of Cyprus’ banking sector whose results are expected on January 18. Preliminary reports suggest banks will need anything between €7.3 billion and €10 billion.
Under the worst-case scenario, an assessment Cyprus hopes to avoid, the total bill for a bailout could rise to €17 billion.
With fiscal needs, that would push Cyprus’ eventual debt burden to 140 per cent of GDP.
Economists say a debt restructuring would be futile in Cyprus' case as the majority of its debt is held by the domestic banks a bailout would be aimed at saving.
"It might satisfy someone's sense of justice, but it won’t solve the problem," said economist Fiona Mullen. "There aren't any easy answers out there, apart from giving them a thousand years to pay it back."
The good news was that Moscow appeared prepared to discuss more lenient terms for Cyprus’ repayment of a €2.5 billion loan it received in 2011.
“We’ll cooperate with European countries on the subject of measures needed to shift Cyprus to a more even schedule for debt repayment,” Russian Finance Minister Anton Siluanov said.
Nicosia has requested a five-year extension to 2021.
An extension would go a long way in helping to make Cyprus’ debt more manageable, according to Cypriot finance ministry officials.
However, although crucial, debt sustainability may not be the final hurdle before the EU gives the green light for the much-needed aid.
Germany has expressed unease about channelling taxpayers' money into a country seen by some as a hub for money laundering and judging from the utterances of various lawmakers, a bailout for Cyprus does not seem to have good chances of going through the Bundestag at present.
"The issue of bank transparency is among issues that Cyprus certainly needs to tackle as part of structural reforms," German Foreign Minister Guido Westerwelle said yesterday.
Cyprus a popular tax haven for wealthy Russians, says it fully complies with international rules against money laundering.
Commissioner Rehn appears to share the German concerns.
"Cyprus has enacted several laws against money laundering in recent weeks and months," Rehn said. "The crucial thing is implementation, to ensure this is not a problem on the island. It is important Cyprus reforms its financial sector in line with European principles. Then we will work alongside Cyprus as we did in Spain."
It is now clear that signing and implementing the bailout memorandum would be the job of the island’s next president, as Cypriots are scheduled to vote mid-February.
Main opposition leader Nicos Anastasiades, who is a frontrunner to win the election and who received clear support from the island’s main European partners yesterday, said Cyprus was determined to implement all measures required for the consolidation of its economy and the creation of prospects of recovery and growth.
Speaking on the sidelines of the summit of the European People’s Party, Anastasiades, who had a private meeting with the German chancellor, said Cyprus was “not asking for any special treatment and that we will be consistent with all our obligations”.
The DISY chief added however, that press reports on money laundering and Cyprus being a tax haven were totally unfair and exaggerated.
What Cyprus needed to do was to be reliable and consistent with what had already been agreed and what might be agreed if the debt is not sustainable, Anastasiades added.
"I must say that I am fully satisfied with my meeting with Mrs. Merkel, the clarifications given to her and the clarifications she has provided," he said.

Additional reporting by George Psyllides