German Campaign Buffets Cyprus Talks as Shiarly Seeks Rescue

Cyprus is beginning a diplomatic effort to win the bailout it requested seven months ago as election-year politics in Germany threaten to impede talks.

With Cyprus Finance Minister Vassos Shiarly speaking to skeptical Dutch lawmakers in The Hague today, German Finance Minister Wolfgang Schaeuble is seeking to satisfy doubters in his Parliament in Berlin to back a fifth euro-area bailout.

By demanding that the so-called troika of creditors deem Cyprus a threat to euro-area stability before aid is provided, Schaeuble has restated European Union rules in an appeal to aid-weary voters spooked by reports of Russian money-laundering in Cyprus. He has also rattled smaller euro states.

“Schaeuble’s hesitation is for domestic consumption, a good cop, bad cop game to convince lawmakers that there’s no alternative to aid to Cyprus and to raise the price” for German approval, Carsten Brzeski, an economist at ING Group in Brussels, said by telephone.

Cyprus has been bogged down in negotiations since June with the troika, comprising the European Commission, European Central Bank and International Monetary Fund. Shiarly speaks to lawmakers at 11:15 a.m. in the Netherlands, where Finance Minister Jeroen Dijsselbloem heads the group of euro finance officials. He may travel to Berlin at a later date.

‘Misleading’ Reports

German Chancellor Angela Merkel’s spokesman, Steffen Seibert, was the latest official to thump the EU rulebook, saying yesterday that to qualify for aid, a country must pose a risk to “all of the euro area.” He dismissed media reports that Germany was softening its stance as “very misleading.”

In smaller euro capitals, which are required to contribute to the ESM, Germany’s message may come across as a threat.

“Aid to euro-zone members can’t depend on the size of the country,” Slovak Finance Minister Peter Kazimir said Jan. 29 in an e-mailed reply to questions. “But of course, not meeting the rules can’t remain unpunished.”

The ECB has already tipped its hand. Executive Board member Joerg Asmussen, Schaeuble’s former deputy, said “disorderly developments in Cyprus” could undermine progress made in the crisis fight last year and send the wrong signal as aid recipients Ireland and Portugal re-enter markets.

Euro-area finance chiefs will probably discuss the Cypriot aid request in March based on the troika’s report, according to the German Finance Ministry. Cyprus may need as much as 17.5 billion euros ($23.7 billion) to pay its bills and recapitalize its banks, Shiarly said in November.

‘Very Skeptical’

With eight months left before the Sept. 22 German election, Merkel is fighting to deflect attacks from her main challenger, Peer Steinbrueck, who has said he’s “very, very skeptical” about aid for Cyprus, citing money laundering and the country’s “inflated” financial sector.

If Steinbrueck’s Social Democrats oppose aid, Merkel for the first time would have to rely on her majority in parliament to pass the package.

Merkel must also persuade allies such as Michael Fuchs, a deputy parliamentary leader of her Christian Democratic Union, which is facing pressure from voters to rein in Germany’s obligations.

“I cannot accept that all of a sudden small Cyprus is systemic,” Fuchs said Jan. 29 in an interview with Bloomberg Television’s Francine Lacqua. Cyprus is “definitely not” a systemic risk, he said.

‘No Other Way’

Schaeuble’s insistence on systemic relevance is “a kind of needling to bring the subject to a head in order to force a clear decision,” Brzeski said. “That will allow him to say there was no other way and the troika report proves it.”

Shiarly will probably face similar resistance when he speaks in the Dutch parliament today.

“It hasn’t been decided if the Netherlands will support Cyprus,” said Eddy van Hijum, a Christian Democrat lawmaker. Henk Nijboer of the Labor party, agreed. “If there’s going to be a package for Cyprus there must be conditions like Greece had on health care, tax evasion, a complete fiscal package.”

Cyprus can’t wait until after the German election for aid, said Nicholas Papadopoulos, chairman of the Standing Committee on Financial and Budgetary Affairs in the Cypriot House of Representatives.

“Cyprus is under immense pressure when it comes to the payment and refinancing of its public debt,” Papadopoulos said by telephone Jan. 29. “And for banks, the longer the insecurity remains, the greater the risk of flight of capital and destabilization of the system.”

‘Ongoing Supervision’

Papadopoulos said the target date for a rescue deal should be end-March and that Cyprus, to soothe doubts in Germany and other EU nations about the legality of the Cypriot banking industry’s activities, would accept an “ongoing supervision” of the financial system by an EU authority.

Such outside monitoring, he said, should help win political backing in Europe for the case that Cyprus is a systemic risk to the euro area because of the sizable presence of Cypriot banks in the Greek economy and because a Cypriot debt default would spark renewed doubts about the integrity of the 17-nation euro.

“Hopefully, it will go a long way to convincing them that it is in their interest to support Cyprus,” Papadopoulos said. “We aren’t looking for preferential treatment. We want solidarity and equal treatment.”

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