Eurozone finance ministers aim to reach a deal on bailing out Cyprus by the end of the month, but details of how the rescue will be financed will only be sorted out in the coming weeks, senior officials said yesterday.
Cyprus requested a bailout in June last year but it was not possible to reach an agreement with the last, communist-led government.
A new, conservative government has now taken office and negotiations have intensified.
President Nicos Anastasiades promised on Thursday to work for a swift deal to prop up the island’s banks, which need capital of around €8-10 billion.
The total bailout, including financing for general government operations and to finance existing debt, could be up to €17 billion, equal to Cyprus’s annual economic output.
Two eurozone officials said ministers meeting in Brussels had failed to agree on how best to finance the bailout, but were committed to agreeing on a rescue programme by the end of this month.
The ministers examined a variety of options to finance the bailout and ensure that it is “sustainable” – that Cyprus can repay what it borrows.
Among the provisions expected is the privatisation of state assets, starting with the island’s telecoms company which could raise up to €1.5 billion, and the restructuring of the bloated banking sector, which has assets eight times larger than the island’s €17 billion economy.
German officials, backed by the Netherlands and Finland, have pushed for depositors in Cypriot banks, many of whom are Russian and British businesspeople, to help pay for the cost of the rescue, a process known as a “bail-in”.
There are concerns in Berlin that Cyprus, with its low corporate tax rate and liquid banking system, has become a conduit for money laundering. Russian individuals and companies have a high level of deposits in the banking sector.
But Cyprus fears any “bail-in” will spark the rapid withdrawal of funds from the island and undermine its entire business model, making the economic situation even worse.
Figures released last week showed a little over two per cent of total deposits was withdrawn in January, although officials say there has since been a return of capital.
Olli Rehn, the European commissioner for economic affairs, warned over the weekend that the prospect of Cyprus leaving the eurozone remained a dangerous possibility, saying such a prospect should be a concern even for big EU economies.