Cyprus Said to Seek $14 Billion in Fifth European Bailout

Cyprus Said to Seek 11 Billion Euros in Fifth European Bailout
The Bank of Cyprus headquarters is seen in Nicosia, Cyprus. Photographer: Chris Ratcliffe/Bloomberg

The Cypriot government will seek an 11 billion-euro ($14.2 billion) bailout, 62 percent of gross domestic product, to recapitalize its banks and pay its bills, according to three people with direct knowledge of the matter.

The country’s banks, which lost more than 4 billion euros in Greece’s debt restructuring earlier this year, need 5 billion euros of fresh capital, according to Finance Minister Vassos Shiarly, the people said. The so-called troika that oversees euro-area rescues puts Cypriot banks’ recapitalization needs at about 10 billion euros, the people cited Shiarly as saying.

“As we are in continual discussions with troika team, you appreciate that, as we have maintained throughout the discussion period, we are unable to comment on the recapitalization figures,” Shiarly said today in an e-mailed reply to questions. “However, regarding to the government’s overall financing and refinancing until January 2016, we confirm that the said figure is approximately correct.”

Cyprus on June 25 became the fifth country in the euro area to seek external aid. No amount was specified for the rescue, which will encompass the public sector as well as banks. Cyprus has also sought a 5 billion-euro loan from Russia. Igor Shuvalov, a first deputy prime minister, said Sept. 8 that Russia may make a decision on the request within a month.

Budget Gap

The two largest Cypriot lenders, Bank of Cyprus Pcl and Cyprus Popular Bank Pcl, failed to meet capital targets, the European Banking Authority said yesterday. The Central Bank of Cyprus put their combined shortfall at 1.86 billion euros as of June 30.

The Cypriot government also needs 6 billion euros to redeem debt and close a budget gap through 2015, Shiarly has said, according to the people who declined to be identified because the information hasn’t been made public. Cyprus faces 4.7 billion euros of bond redemptions in the period, according to data compiled by Bloomberg.

The government, which had 492.4 million euros in the bank at the end of August, faces 751 million euros of maturing debt through the end of November, according to the Finance Ministry. The government also has monthly outlays for salaries, subsidies and social programs, with a larger year-end wage payment due in December.

Public Payroll

Striking a bailout deal with the troika, consisting of officials from the European Commission, European Central Bank and the International Monetary Fund, is essential for the government to pay its bills through the end of the year, the people cited Shiarly as saying.

The Cabinet has approved a counter-proposal to the troika that it plans to discuss with political parties, unions and business groups tomorrow.

Cyprus will propose budget savings starting next year that total 1.02 billion euros in four years, whereas the troika seeks 975 million euros of cuts in three years, according to a draft of the proposal obtained by Bloomberg News.

The government plans to but the public payroll by 247.3 million euros in the period, staring with a 34 million-euro reduction next year, according to the draft. The plan also foresees an increase in pension contributions for civil servants and a decrease in expenditures of 87.8 million euros. Spending on welfare benefits will drop by 109.1 million euros.

Wage Indexation

Revenue is seen rising by 482.5 million euros during the four-year period, boosted by an introduction of fees for medical services in state hospitals, a tax increase on tobacco and alcohol, raising the value-added tax by 1 percentage point to 18 percent, improved tax collection and dividend payments from state-owned companies, according to the draft. Property taxes will also rise.

Communist President Demetris Christofias said on Greek television yesterday that he won’t agree to a bailout that requires Cyprus to scrap wage indexation and the so-called 13th salary or includes privatization of profitable state-owned companies.

Shiarly told reporters that Cyprus may receive the first instalment of aid at the end of December if the terms of the bailout are approved by euro-area finance chiefs by mid-November. No date has been set for reopening talks with the troika, he said. Cyprus has been shut out of markets since May 2011.

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