Chancellor Angela Merkel threw her support behind the head of Cyprus’s main opposition party before the island nation’s presidential election next month, while warning that a bailout is still a long way off.
The German leader arrived in the Cypriot seaside town of Limassol today to promote the candidacy of Nicos Anastasiades, head of the DISY opposition, to succeed communist President Demetris Christofias, who isn’t seeking reelection.
“We’re here to support our partner, and we hope that Mr. Anastasiades is successful in the election,” Merkel told reporters before a meeting of the conservative European People’s Party. Cyprus must first move forward with reforms before euro countries can “talk about solidarity,” she said.
Euro-area leaders loath to seek new taxpayer bailout funds have wrestled with a Cyprus rescue since it became the fifth euro state to seek aid last June. Scrutiny over a bailout that could approach the size of Cyprus’s roughly 18 billion-euro ($24 billion) economy has slowed attempts to find a solution.
Negotiations are “far from the stage at which we can make a decision,” Merkel said. Anastasiades, by contrast, urged policy makers to reach an agreement “as soon as possible to avoid the worst. There are visible dangers to delay.”
Irish Prime Minister Enda Kenny, while calling on the Cypriots not to let their crisis “fester,” said it “may well fall to the incoming government” to conclude a deal.
Anastasiades, who leads in the polls before the first round of the election on Feb. 17, said after today’s meeting that he had assured Merkel and his other EPP colleagues of his determination to do what’s needed to reform the economy and promote economic growth.
“I explained that Cyprus has prospects and can make it, but we need the help of our European partners to avoid short-term but real dangers,” he said.
German lawmakers from inside and outside Merkel’s coalition this week raised concerns about a bailout for the euro area’s third-smallest economy, possibly endangering a parliamentary majority required to pass any aid.
Rainer Bruederle, the caucus leader for Merkel’s Free Democratic coalition partner, told Bild on Jan. 9 that there are “too many question marks,” leaving taxpayers with the impression that they would be bolstering tax evasion by directing funds to Cyprus’s banks, which lost more than 4 billion euros in Greece’s debt restructuring.
Anastasiades hit back on accusations of illicit funds, which have included allegations of deposits by Russian billionaires exploiting Cyprus’s favorable tax regime.
“References to laundering dirty money and the Cypriot tax paradise are totally unjust and exaggerated,” he told reporters after the meeting. “Cyprus is totally consistent with its international obligations on this matter.”
Aid for Cyprus will test policy makers’ commitments to hold the 17-nation currency bloc together and avoid more sovereign-debt writedowns after they called Greece’s restructuring a one-off. The workarounds may put most of the burden on bank bondholders and possibly depositors.
Anastasiades dismissed the prospect of imposing losses on bank bondholders. “I don’t think there are going to be any haircuts,” he said. “I do believe we can find a lot of other solutions.”
‘Not an Option’
European and Economic Affairs Commissioner Olli Rehn told the German newspaper Handelsblatt in an interview published yesterday that “a haircut is not an option for us,” when asked about the prospect of debt relief for Cyprus.
“After Greece, the Cypriot economy is also being tested,” Greek Prime Minister Antonis Samaras said in Limassol. “Through difficulties we become stronger, and I genuinely believe that just as Greece is making it, Cyprus will make it.”
Cyprus may need as much as 17.5 billion euros to pay its bills and recapitalize its banks, Finance Minister Vassos Shiarly said in November. The government says it has enough cash to last through March.
Moody’s Investors Service, citing the government’s projected debt load from recapitalizing the banking system, cut Cyprus’s credit rating three steps to Caa3 yesterday.
Standard & Poor’s said Dec. 21 it sees the risk of a sovereign default as “considerable and rising.” Cyprus’s public debt will be 97 percent of gross domestic product this year and 103 percent in 2014, the European Commission forecasts. S&P expects it to rise “well above 100 percent” in the bailout aimed at shoring up the country’s banks.