Bailout being negotiated to prevent default by Cyprus

Posted Mar 15, 2013 by Ken Hanly
Eurozone finance ministers are meeting along with IMF head Christine Lagarde to discuss a bailout for Cyprus. The final decision may be delayed until discussions with Russia which has strong business ties with Cyprus.
Flags on top of building in Nicosia Cyprus
Flags on top of building in Nicosia Cyprus
Euro zone finance ministers' chair Jeroen Dijsselbloem said: "We're going to take stock of the situation in Cyprus, hear from the institutions ... we will see how far we will get." The new president of Cyprus, Nicos Anastasiades has promised that he would seek a bailout. The package is expected to involve tax increase, revenue raising measures, plans for privatizations, and an overhaul of the banking system to ensure that the debt payments can be sustained. Russia may help by extending a 2.5 billion euro loan due in 2016. It could extend the loan for five years and reduce the present 4.5% interest rate.
Angela Merkel, the German Chancellor, stressed that priority was being given to solving the problems in Cyprus. Merkel said after a meeting of European Union leaders:"To leave Cyprus up to its own devices and simply see what happens would not be responsible, in my view."
While Cyprus' GDP is just over 0.2% of the euro zone total, without emergency lending it could very well default and shatter investor confidence. The European Central Bank has promised to do whatever is necessary to shore up confidence in the zone.
Cyprus had originally estimated it need almost 17 billion euros to keep afloat with up to 10 billion going to recapitalize banks and the other 7 billion to service debt and run government operations. Policymakers found this amount much too large and claimed that it would raise debt to unsustainable high levels. More revenue was sought within Cyprus itself.
Discussions now range from 10-13 billion euros with the low end being emphasized. A final agreement requires approval of the troika of the IMF, European Commission and European Central Bank. The Cypriot Finance Minister is traveling to Moscow for meetings early next week in the hope that Russia will help out.
While the IMF has urged that depositors in Cypriot banks bear some of the bailout costs, this idea has been rejected by Cyprus, the European Commission and even some member of the ECB. Many critics thought that such a move would weaken confidence in banks across Europe.
However, there is support growing for imposing taxes on those who have money in Cypriot banks. Suggested are a tax of 5% on total deposits or 20 to 30 percent on interest.
The nominal corporate tax rate will also likely be raised and state assets sold off.