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Cyprus Writeoff Prospect Roils Policy Makers Plotting Bailout

European policy makers struggled with the prospect of a writeoff of Cyprus’ debt, stuck between their pledge that Greece was a one-off and an International Monetary Fund push for sustainable finances there.

It’s “foreseeable” that Cyprus’ debt level after a bailout to aid its banks will be so high that “it is no longer sustainable,” European Central Bank Executive Board member Joerg Asmussen said on Germany’s ARD television today.

The former deputy German finance minister was contradicted minutes later by Jean-Claude Juncker, Luxembourg Prime Minister and head of the group of euro finance ministers. “We made an exception for a private-sector debt writedown in Greece, we didn’t say Greek-speaking countries,” he told Deutschlandfunk.

European leaders imposed losses on holders of Greek notes, in the biggest sovereign restructuring ever. Standard & Poor’s cut Cyprus’s long-term debt rating for the third time in five months and said today it sees the risk of a sovereign debt default as “considerable and rising.”

Cyprus’s public debt will be 97 percent of gross domestic product next year and 103 percent in 2014, the European Commission forecasts. S&P expects it to rise “well above 100 percent” in a bailout aimed at shoring up the country’s banks.

Cyprus has been bogged down in negotiations with the IMF and European authorities since June, when it became the fifth euro-area nation to request assistance. Cypriot banks lost more than 4 billion euros in Greece’s debt restructuring.

‘Unhealthy’ Speculation

“I don’t expect a debt writedown to be one of the priority instruments and I’d like to rule it out,” Juncker said in a radio interview with Deutschlandfunk. “It would be unhealthy to speculate about that.”

The IMF said yesterday “discussions continue between the Cypriot authorities, the IMF and the European partners on determining a financing solution for the country that is consistent with debt sustainability,” raising the prospect of a write-down.

The IMF added it doesn’t expect discussions to conclude this year.

Cyprus Finance Minister Vassos Shiarly said a writedown would be pointless since most government bonds are held by local banks, Athens News Agency reported today.

Juncker said he hopes the euro area’s 17 finance ministers will “almost conclusively” deal with issues related to Cyprus at a meeting in January. “It will be tough to explain to the northern European taxpayer that we have to act on Cyprus, still, it needs to happen,” he said.

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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