Cash-Strapped Cyprus Looking to EU, Elsewhere for Aid

Reuters

Cyprus is looking to Europe and elsewhere for the best possible bailout terms, its central bank chief said on Wednesday, as local media reported the euro zone's third smallest economy would spurn its EU partners to borrow from Russia or China.

Speculation is mounting that an international bailout for Cyprus is imminent, but its communist government has kept markets guessing on whether it will resort to the EU bailout mechanism, or turn to Russia - a close ally - or China.

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"If we eventually apply, because it is not a given that we will apply (and) there are also other options, we will seek the best possible terms for the economy," said Panicos Demetriades, the governor of Cyprus's central bank.

The euro zone minnow, shut out of capital markets for more than a year, must find the equivalent of 10 percent of its gross domestic product by June 30 to recapitalize Cyprus Popular Bank if no private investor comes forward.

Bilateral lending, which the Cypriot finance minister has repeatedly described as "not the preferred option" is returning to prominence as a likely scenario.

Russia, which bailed Cyprus out last year and is an important business partner, was back in the frame as a potential lender again, newspapers reported.

Haravghi, the mouthpiece of the ruling AKEL Communist party and one which generally reflects government thinking, said attempts were underway to borrow from a third country with "more favorable terms". It did not name that country, but four other newspapers on Wednesday suggested Russia.

Cyprus has repeatedly displayed caution about strings which may be attached to any bailout from its EU partners.

Its primary concern is that its cherished 10 percent corporate tax rate could be compromised. Austerity measures similar to those imposed on other bailed-out states, including Greece, would also force the government into unpopular spending cuts ahead of a general election due by February 2013.

Asked whether the prospect of bilateral lending was distant, Finance Minister Vassos Shiarly told state TV in an interview on Tuesday night: "I would say not."

Nonetheless, a resort to bilateral lending rather than EU partners would raise eyebrows within the bloc, particularly as Cyprus is poised to assume the European Union's rotating presidency on July 1.

Economist Stelios Platis said the government may be dangling the option of bilateral lending as leverage to potentially extract better bailout terms from the EU.

"They want to exhaust all options and time to find alternative means of finance. In my view it's an ill-conceived idea that this can be negotiated. It's (the) wrong strategy, you can't use this as leverage," Platis said.

The timing of any application for aid is also unclear. Demetriades, citing the sensitivity of the issue, declined to comment.

But in the television interview, Shiarly reiterated earlier comments that the island would not "wait until the last day" to take action to prop up Popular, either through bilateral lending or by resorting to the European Financial Support Facility.

"It's like plucking daisies, wondering 'will we get in to the mechanism, we won't, we will, we won't'," said George Perdikis, an MP for the Green's party.

Popular and the other main bank, Bank of Cyprus were hit heavily by the writedown on Greek debt, which was restructured as part of Athens' second EU/IMF bailout deal. Bank of Cyprus has almost completed its recapitalization privately.

Moody's Investors Service on Tuesday cut its credit rating on Bank of Cyprus, and put Popular on review for a downgrade, citing the increased risks of a possible Greek exit from the euro zone. Cyprus's third bank, Hellenic was also downgraded.