Policy makers began meeting at 5 p.m. yesterday in Brussels in a hastily convened gathering, seeking to trim the amount of aid, overcome differences on losses for investors and decide on a role of the International Monetary Fund.
Making way for the currency bloc’s 17 finance ministers, Merkel said that while euro countries won’t provide assistance “under any conditions,” the currency union needed to prevent Cyprus from lurching toward insolvency.
“Simply to leave Cyprus alone and see what happens would be, in my view, irresponsible,” Merkel told reporters in the Belgian capital after a two-day European Union summit. In her wake, the finance officials arrived, along with European Central Bank President Mario Draghi and IMF chief Christine Lagarde, for the Cyprus talks.
Even though it accounts for less than half a percent of the euro economy, the Mediterranean island nation has tested leaders’ resolve in overcoming the debt crisis and preventing contagion to Italy and Spain. A central conflict among officials has become which investors will be called on to sustain losses, given the aftermath of Greece’s debt restructuring last year. Uncertainty surrounding that bailout triggered a renewed round of market turbulence.
As rescue talks continued, Cypriot Finance Minister Michael Sarris shuttled between meetings with his counterparts and conferences with President Nicos Anastasiades, who remained in Brussels after most EU leaders headed home.
Dutch Finance Minister Jeroen Dijsselbloem, the chairman of the group of euro finance ministers, said officials will seek a “good solution.” German Finance Minister Wolfgang Schaeuble said ministers must overcome “very difficult” challenges to rescuing the country, the bloc’s fifth rescue since the debt crisis began in 2009.
Cyprus’s “sovereign debt is too high; the deficit is too high; the economic situation is the way it is; the banking sector is disproportionately large,” Schaeuble told reporters as he entered the meeting, which could go late into the night.
Officials have fallen short of agreement on Cyprus since it requested assistance last June, clashing over issues such as debt sustainability, the presence of Russian wealth and disagreements with the previous government. They also are seeking an independent review of anti-money-laundering efforts as a way to reassure voters in Germany and other creditor countries about the bailout’s bona fides.
The election of Anastasiades, who participated his first EU summit, breathed new life into talks after he took office on Feb. 28.
Still, front-and-center was the conflict on cost sharing. Dutch Prime Minister Mark Rutte said an agreement should involve a broad swath of investors, while Luxembourg Prime Minister Jean-Claude Juncker warned that losses on depositors and other senior creditors should have no place in a package.
“It is very frustrating Cyprus got into this,” Rutte told reporters today. “In any case, we want private-sector participation as well as IMF involvement.”
Juncker warned that such a “brutal form of haircut” of the kind that was imposed as part of the Greek rescue could upend a market calm that ensued after the ECB last year pledged to buy unlimited sovereign debt.
“One has to pay very good attention to the credibility of the entire zone by not giving the impression that one is doing here in a tweaked way what we did in Greece, while we said we wouldn’t do that ever again,” Juncker said today.
Finance ministers aim to reduce the size of a rescue from an expected 17 billion euros ($22 billion) to about 10 billion euros, Dijsselbloem said this week. He declined to say the exact amount under review, instead citing prior estimates of 10 billion euros to shore up Cypriot banks and 7 billion euros to fund the government.
A final deal must include ways to reduce Cypriot debt to about 100 percent of gross domestic product by 2020, he said.
“It is useless to develop a program if it is impossible for a country to get out of the valley,” he said.
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