Cyprus Seeks Russian Loan to Improve Terms If EU Rescue Needed

Cyprus, which may need as much as 6 billion euros ($7.6 billion) to prop up its banks, is pursuing a loan from Russia to improve its bargaining position in case it has to turn to its euro-area partners for emergency aid.

“We have to obtain financing to recapitalize the banks; this is unavoidable,” Finance Minister Vassos Shiarly told reporters in Nicosia today. If the 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, which joined the EU in 2004, would be the fifth euro nation to seek a bailout, buffeted by the single-currency bloc’s debt crisis, now in its third year. More than 386 billion euros in loans have been pledged to Greece, Ireland and Portugal. On June 9, Spain requested as much as 100 billion euros to support its banks. Cyprus has been shut out of markets for more than a year.

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.

Strict Conditions

Before seeking assistance from the euro area, which would come with strict conditions, Cyprus is approaching countries including Russia for loans, government spokesman Stefanos Stefanou said, declining to elaborate.

The Cypriot newspaper Alithia reported on June 12 that Cyprus was asking Russia for 5 billion euros. The Politis daily said three days later that Cypriot President Demetris Christofias was leading the loan talks.

The Russian Finance Ministry’s press office didn’t immediately reply to e-mailed questions about the reports.

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.

President Vladimir Putin “recently spoke about the euro countries in very kind terms,” Medvedev said. “If a loan is given, it won’t be the kind of assistance that will be an economic turning-point, but psychologically it will be extremely important.”

Macroeconomic Imbalances

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 make the Cypriot economy more competitive, Shiarly said.

EU pressure has revealed fractures in the Cypriot government.

On May 31, the Finance Ministry said the government “remains committed to carrying out the necessary structural reforms and achieving the fiscal targets set” by the EU.

A day later, Christofias, whose term ends next February, announced that “the president is the one who dictates policy,” not individual ministries. “Ι will not allow workers to shoulder any additional burden,” he said. “Recommendations are recommendations, not directives.”

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 Investors Service who now teaches economics at Frederik University in Nicosia.

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

Before it's here, it's on the Bloomberg Terminal. LEARN MORE