Writedowns on Cypriot government debt like those forced on Greek bondholders would leave banks in Cyprus “decimated” and make it harder for other euro-area nations to borrow, said Hung Tran, first deputy managing director of the Institute of International Finance.
“Economic dislocations would be severe and the cure might end up being worse than the disease,” Tran said in a telephone interview today. Germany’s Sueddeutsche Zeitung reported today that the International Monetary Fund is pushing for debt writedowns as a condition of any rescue package for Cyprus.
The Washington-based IIF coordinated the private-sector process that shaved more than 100 billion euros ($132 billion) off Greece’s debt earlier this year. European Union leaders have said Greece was a special case that required an “exceptional and unique solution.”
“If the leaders agree Cyprus should go through the PSI exercise, that would be undermining their own credibility and clearly raise the credit risk on other program countries in the euro area,” Tran said.
Cypriot banks, already reeling from the effects of the Greek writedown, hold most of the nation’s 15 billion euros in central government debt, and the island’s banking system would be “decimated” by moves to restructure that debt, Tran said. Cypriot banks lost more than 4 billion euros in Greece’s debt restructuring.
Cyprus has been bogged down in negotiations with the IMF and European authorities since June, when it became the fifth euro-area nation to request assistance. Luxembourg’s Jean-Claude Juncker, who heads the group of euro-area finance ministers, said on Dec. 14 that finding a solution for Cyprus is a top priority for him because the situation is “more serious than Greece” and needs immediate attention.