A planned aid package for Cyprus is being delayed by the government’s differences with the International Monetary Fund over Cypriot banks’ capital needs, President Demetris Christofias said.
“The problem of the banks has completely overturned the apple cart,” Christofias told reporters today in Strasbourg, France. “The IMF believes that our needs are maximum needs. We believe that they are lower. We are now awaiting clarification of the situation so that we can confirm finally what the exact figure is.”
Cyprus has been negotiating with the IMF and the euro area for seven months over the size and terms of a rescue for the government and lenders weakened by their exposure to the Greek economy.
Cypriot financial institutions such as Bank of Cyprus Plc (BOCY) and Cyprus Popular Bank Pcl lost more than 4 billion euros ($5.4 billion) in a Greek debt restructuring that was part of a second international rescue of Greece last year.
After commissioning Pacific Investment Management Co. to assess how much banks in Cyprus need, the Cypriot government hired BlackRock Inc. (BLK:US) to assess Pimco’s methodology. An initial draft of Pimco’s report led Cypriot central bank chief Panicos Demetriades to estimate that the rescue of banks in Cyprus may cost as much as 10 billion euros, an amount cited today by Cypriot officials including Christofias. The final figure is scheduled to be published around the end of this week.
Christofias urged the euro area to let its permanent rescue fund, the European Stability Mechanism, lend directly to Cypriot banks rather than aid them through the national government in order to limit the financial burden on Cyprus.
“That would be a fair move,” he said. “It has to be done directly rather than burdening the debt of Cyprus.”
Euro-area finance ministers are working on guidelines to allow the ESM to lend directly to banks, a step that will be possible once the European Central Bank takes on a new role of overseeing lenders. The 17-nation currency bloc’s single supervisor is scheduled to start on or after March 1, 2014. Direct recapitalization of lenders via the ESM could take place earlier if the guidelines are in place and the ECB takes up its role sooner.
Christofias, a communist who isn’t running for another term in an election scheduled for Feb. 17, said the vote has complicated aid talks with the euro area and the IMF. He said Cyprus might have gained “further understanding from abroad” were no election being held next month. Polls show Nicos Anastasiades, head of the center-right DISY opposition party, is leading the race.
Christofias said sealing a rescue accord with the European Commission, the IMF and the ECB -- the so-called troika of international negotiators -- may fall to his successor.
“If the troika is ready, then we are also ready to sign the memorandum,” he said. “If they’re not ready and the discussions continue on the level of requirements, then the new government will have to deal with it.”
The planned Cypriot aid package will be the fifth in the euro area following some 486 billion euros in European and IMF commitments for Greece, Ireland, Portugal and Spain’s banking system since 2010. Financial rescues are tied to budget- austerity conditions that Christofias criticized in a speech earlier today to the Strasbourg-based European Parliament.
“It’s my firm conviction that unilateral policies of austerity are a guaranteed recipe for failure, only succeeding in making the rich richer and the poor poorer,” Christofias said.
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