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Cyprus Said to Face Europe Pressure for $13 Billion Aid

Cyprus Said to Face Europe Pressure for EU10 Billion Aid Program
The European Union flag, left, is seen flying alongside the Cypriot national flag in Nicosia. Photographer: Chris Ratcliffe/Bloomberg

European authorities are pushing Cyprus to take a full bailout package worth as much as 10 billion euros ($12.7 billion), resisting the country’s attempt to limit any aid to its banking system, two officials said.

Bargaining with Cyprus, which is also pursuing a loan from Russia, will continue on June 21 when euro-area finance ministers grapple with salvaging Spain’s banking system and a possible relaxation of Greek aid terms. If the Russian loan comes through, the country could use that agreement to improve its bargaining position with its euro-bloc partners.

“We have to obtain financing to recapitalize the banks; this is unavoidable,” Finance Minister Vassos Shiarly told reporters in Nicosia yesterday. If euro-area cash comes with too many strings attached, Cyprus will have other options, he said. “Your negotiating position in talks with the European Union is much better when you have a bilateral loan already approved.”

Cyprus is angling for banking assistance to escape the oversight required in the programs granted to Greece, Ireland and Portugal, said the EU officials who asked not to be named because the talks are private. Cyprus would be the fifth of 17 nations to take a financial lifeline, since Spain is already in talks for a rescue limited to its banks.

Russian Loan

The Russian Finance Ministry hasn’t received an official loan request from Cyprus, a spokesperson said, speaking on condition of anonymity in line with ministry rules. Cyprus also hasn’t yet put in a bid for euro-area aid.

Cyprus, which joined the EU in 2004 and the euro in 2008, defied European pressure to make a request before the Greek election on June 17, one of the officials said.

The European Central Bank and European Commission want to link any request with the intrusive oversight since the sums under consideration would surpass half of Cyprus’s 18 billion-euro gross domestic product, dwarfing the size of previous packages, the officials said.

Shiarly said that unlike a loan from Russia, European aid would come with conditions, probably including implementation of the European Commission’s recent recommendations intended to rectify macroeconomic imbalances and overhaul the Cypriot economy.

Pavel Medvedev, an adviser to Bank Rossii Chairman Sergey Ignatiev, said he “wouldn’t be surprised” if Russia extended a second loan to Cyprus in as many years. Last December, Russia lent 2.5 billion euros to the island nation.

Buy Shares

The government needs as much as 6 billion euros over two years for the banks, which have been hit by losses in Greece, Michael Sarris, chairman of Cyprus Popular Bank Pcl, the island’s second-largest, said on June 15. The government will probably need funds to buy shares in a 1.8 billion-euro rights offer by Cyprus Popular, he said. Last year, the bank posted more than 3.6 billion euros in losses, mainly on Greek government debt writedowns.

Cyprus’s lenders may lose access to ECB funding after Moody’s Investors Service downgraded the country’s ratings, Sarris said. He said Cyprus Popular has been servicing its funding gap in Greece from Cyprus because the lender doesn’t have access to Greece’s Emergency Liquidity Assistance.

For economist Bernard Musyck, a loan agreement with Russia could reduce Cyprus’s appetite for reforms and may not avert a European bailout.

“It looks like the government is shifting the responsibility of honoring the loan to the next administration and confronting it with a fait accompli,” said Musyck, a former analyst for Moody’s who now teaches economics at Frederick University in Nicosia.

“The next government may need a bailout to pay back the loans,” he said.

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