Cyprus may need more than the 10 billion euros ($12.4 billion) staffers have estimated for a financial lifeline after bigger shortfalls than anticipated were found on the government’s balance sheet, according to the minutes of a meeting of international and Cypriot officials.
A mission of officials from the European Commission, European Central Bank and the IMF, the so-called troika, met with Cypriot lawmakers on July 27 to present findings from their analysis of the country’s economy. On June 25, Cyprus became the fifth of the euro area’s 17 member states to seek external aid.
“Your public finances are in a worse shape than we expected,” Maarten Verwey, a troika official and a deputy head of the commission’s Directorate General for Economic and Financial Affairs, said according to the minutes of the meeting obtained by Bloomberg News. “It is clear you have problems in your banking sector. It is not just the major banks in Cyprus, but the problems affect the entire banking sector.”
Euro-area finance ministers approved the bailout request from Cyprus on June 27. No amount was specified for the rescue, which will encompass the public sector as well as banks. Cyprus also sought assistance from the IMF and Russia.
‘Further Economic Cooperation’
Cypriot banks lost more than 4 billion euros in Greece’s debt restructuring earlier this year. The government had to rescue the island’s second-largest lender, Cyprus Popular Bank Pcl, in May by underwriting a 1.8 billion-euro capital increase. On June 27, Bank of Cyprus Pcl requested 500 million euros in temporary aid to meet regulatory requirements.
Russian President Vladimir Putin and his Cypriot counterpart, Demetris Christofias, discussed “further economic cooperation” between the two countries during a phone conversation today, the Cypriot government said in an e-mailed statement.
Christos Christofides, a government spokesman, declined to say if the two leaders discussed Cyprus’s request for a 5 billion-euro loan.
Mainly Russian non-residents hold one of every two euros deposited at Cypriot banks, directly or indirectly, according to Theo Parperis, chairman of the Institute of Certified Public Accountants of Cyprus.
The EU’s Verwey declined to speculate on how much assistance Cyprus may require in the troika’s meeting with lawmakers, according to the minutes, which were verified by two officials involved in the talks. The officials declined to be identified because the meeting was private.
Spokespeople for the commission and the ECB couldn’t be reached immediately for comment.
Cyprus could return to financial markets after it tackles its budget deficit and structural reforms, the troika said. The government needs to trim its payroll and spending on social programs, overhaul the pension system and wage indexation and enhance supervision of banks, according to the minutes.
The Cypriot government intends to narrow its budget deficit to as little as 2.5 percent of gross domestic product this year from 6.3 percent in 2011.
The Cypriot economy, which has contracted for three straight quarters, will see a “deep recession” continue into 2013, Verwey said.