March 4 (Bloomberg) -- Euro-area finance ministers wrestled over an aid package for Cyprus, trying to ease the island country’s debt without repeating earlier crisis-management mistakes that destabilized European markets.
A new government in Cyprus seeks a speedy wrapup of bailout talks that have dragged on since June as concern over the terms of the package accelerated the flight of deposits from Cypriot banks.
“It’s important to find a good solution whereby we weigh these risks,” Dutch Finance Minister Jeroen Dijsselbloem told reporters in Brussels today before chairing a meeting of euro-area finance chiefs. “I understand there’s uncertainty.”
Cyprus, which accounts for 0.2 percent of the 17-nation euro-area economy, is testing the crisis response as Europe is mired in a recession and a political vacuum in Italy poses bigger potential dangers for the health of the euro.
A week after Nicos Anastasiades took over as Cypriot president, finance ministers said the pieces of an aid package have yet to fall into place and probably won’t do so until late March.
Instead, the German-led group of creditors will urge new Cypriot Finance Minister Michael Sarris to sell state assets, assure the enforcement of new anti-money-laundering laws and reduce the economy’s dependence on the banking industry.
Tougher money-laundering controls “have to be put into practice,” Austrian Finance Minister Maria Fekter said. “We have to have the facts on the table so we can put the package together.”
European officials are also trying to persuade Germany that diminutive Cyprus could pose outsize risks for the euro, just as the debt crisis was ignited by Greece, which makes up about 2 percent of the overall economy.
European Union Economic and Monetary Commissioner Olli Rehn took his case to the German public yesterday, telling Spiegel magazine that “even when you come from a large EU country, you should be aware that every euro country is systemically relevant.”
In a replay of last year’s standoff over Greece, the International Monetary Fund is insisting that European loans for Cyprus come with steps to reduce the country’s debt burden, estimated by the EU at 93.1 percent of gross domestic product in 2013, without accounting for any potential aid.
While that figure is lower than the debt of Greece, Ireland, Italy, Portugal, Spain, Belgium or France, it could balloon when rescue loans are added that officials say would be roughly equal to Cyprus’s annual GDP. Such a burden would be “unsustainable,” making the IMF unlikely to chip in.
“Cyprus is quite difficult,” said Irish Finance Minister Michael Noonan. “The conditions are not yet in place for the board of the IMF to make a decision to participate.”
Debate is centering on how to shrink Cyprus’s banks and force losses on bank shareholders and bondholders without setting precedents that undermine confidence in the broader crisis management during a phase of relative market stability.
Concern that accounts in Cyprus aren’t safe led to a drop in bank deposits to 68.4 billion euros ($89 billion) in January from 70.2 billion euros in December, according to Cypriot central bank data.
“One of the strengths of Europe is from the crisis in 2008 that we showed that clients’ deposits are safe,” Luxembourg Finance Minister Luc Frieden said. “If we now go in that direction then the question will be asked generally about deposits’ safety. I don’t think this is a good solution.”
Finance ministers will also discuss a possible extension of bailout-loan maturities for Ireland and Portugal, though no decisions are planned.
Ireland is “not pushing for a decision until we know it’s of benefit to Ireland,” Noonan said.
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