Cyprus Presents Systemic Threat to Euro Area, Merkel Ally Says

German lawmakers recognize that a collapse in Cyprus’s banking industry would pose a threat to euro-area stability, an ally of Chancellor Angela Merkel said, suggesting that Germany won’t block a bailout package.

The comments by Norbert Barthle, a lawmaker and budget spokesman for Merkel’s Christian Democratic Union-led bloc, are the first by a senior German government official to acknowledge the systemic risk to the 17-nation euro region posed by Cyprus. Germany’s Finance Ministry has said rescue-fund rules stipulate that a country must pose a risk to the stability of the entire region before it can be eligible for bailout loans.

“From everything that I know, I would expect that one will come to the conclusion that it’s relevant,” Barthle told reporters today in Berlin. “One has to take a very close look at the issue of contagion, especially since the Cypriot banks are very closely tied to the Greek banks.”

German and European officials have been squabbling over whether the Mediterranean island nation represents a critical risk to the euro area in its fourth year of a debt crisis. Euro finance ministers have yet to reach an agreement on the bloc’s latest bailout package since negotiations began in July.

The question of Cyprus’s relevance “must be asked,” Finance Ministry spokesman Martin Kotthaus said this week, after Der Spiegel reported that European Central Bank President Mario Draghi had pressed German Finance Minister Wolfgang Schaeuble into recognizing that the country posed a risk.

Barthle said the issue of Cyprus’s threat to the euro will be resolved when legislators see that the country is systemically relevant to the currency. Open questions remain on Cyprus’s debt sustainability, Russia’s involvement, harmonizing its tax system, privatizing state assets and accusations of money laundering, he said.

On the laundering allegations, “Cyprus has to make substantial progress in countering these accusations,” Barthle said. “This will have to be assessed very closely, otherwise I can’t imagine that there will be an approval of any package.”

An extension of Russian loans to Cyprus will offer European officials “a bit of time” to agree on a bailout package, though that timetable won’t stretch until German parliamentary elections in September, Barthle said.

To contact the reporter on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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