Cyprus sees Greek vote easing its path to aid

GREECE'S election has cleared the way for Cyprus to obtain urgently-needed funds to recapitalise its banks by the end of the month, either from the EU rescue fund or through a bilateral loan, the finance minister said yesterday.

Cyprus is heading towards a firm deadline of June 30 to find €1.8 billion to recapitalise its second largest lender, the Popular Bank, which was hurt by its exposure to a write-down on its Greek debt holdings.

That could make Cyprus the fifth euro zone country to turn to the European Union's bailout fund after Greece, Ireland, Portugal and Spain, but it is also considering taking a bilateral loan instead, possibly from Russia.

According to reports from Bloomberg news agency European authorities are pushing Cyprus to take a full bailout package worth as much as €10 billion, resisting the attempt to limit any aid to its banking system, two EU officials told the agency.

It said the EU officials asked not to be named because the talks are private, and that the European Central Bank and European Commission want to link any request with intrusive oversight since the sums under consideration would surpass half of Cyprus's €18 billion gross domestic product.

“Bargaining with Cyprus, which is also pursuing a loan from Russia, will continue on June 21 when euro-area finance ministers also grapple with salvaging Spain's banking system and a possible relaxation of Greek aid terms,” said Bloomberg.

It also said that Cyprus defied European pressure to make a request before the Greek election, one of the officials said.

Finance Minister Vassos Shiarly said earlier yesterday: "We are optimistic we will get the financing we need to recapitalise the banks, whether that will be through a bilateral agreement, or through the (EU).”

"We believe that with a new Greek government now, swifter arrangements can be made," Shiarly said. "Certainly the direction we think is that Greece will have a government which will retain Greece in the eurozone, and that is a very positive development, it takes away a lot of the pressure and anxiety which may come about for the eurozone system and Cyprus."

The island's banks are heavily exposed to Greek private debt, and the prospect of a new Greek government rejecting an EU bailout was viewed in Cyprus as a potential catastrophe that would multiply the cost of Nicosia's own bailout.

Those concerns subsided after the victory in Sunday's election by Greek conservative leader Antonis Samaras, who is committed to continuing Greece's EU bailout.

Shiarly did not say how much Cyprus would seek beyond the €1.8 billion it needs to fund Popular, which needs capital to satisfy regulators after its balance sheet was hurt by a write-off of Greek government debt this year.

Cyprus, which accounts for about 0.2 per cent of the eurozone's economy, has been at pains to stress that its economic predicament is confined to its banking sector. Government officials have implicitly laid blame on lax supervision by a former regulator and by the banks.

But fiscal slippage and delays in reforms have also been cited by ratings agencies, two of which now class Cypriot sovereign paper as junk.

No application to the EU had yet been submitted, and any bid would look at overall needs of the economy, Shiarly said. Cyprus was not seeking new funds to cover its fiscal needs which are covered by current loans though Shiarly did not rule out any aid may not be restricted just to the banking sector.

"Time is pressing, we are counting the hours before June 30, and the last time I checked there are 278 hours within which we must arrange the recapitalisation of the banks," he said.

Christofias, the EU's only Communist leader, is keen to avoid the fiscal and regulatory conditions that the European Union attaches to its bailout funds. In particular, Cyprus jealously guards its 10 per cent corporate tax rate, the EU's lowest, which attracts offshore investment.

At the same time the government is trying to reign in its budget deficit, which is currently around 1.0 per cent, or between €150 million to €200 million, off the 2.5 per cent mark.

Shiarly conceded that measures to correct the deviation should have been in place at least two weeks ago if not for problems regarding their type.

“We are seeking to find understanding to have wider acceptance of the measures from all involved or affected,” the minister said. “Our intention and effort is to complete the package and submit it as soon as possible.”

Finance Minister Vassos Shiarly