Cyprus Votes Again to Choose Crisis-Ravaged Economy’s Savior

Cypriots return to the ballot box today to elect a new leader who can avert the island nation’s financial collapse after a first-round presidential election failed to deliver an absolute winner.

Nicos Anastasiades, 66, the head of Cyprus’s main opposition Disy party who is endorsed by German Chancellor Angela Merkel, faces a run-off vote against Stavros Malas, 45, a former health minister. Anastasiades took 45.5 percent in the first ballot to 26.9 percent for Malas, who is backed by the communist Akel party of outgoing President Demetris Christofias.

Cyprus’s new president will have to revive stalled talks with European partners on aid that is needed to avert meltdown. Cyprus, a European Union member since 2004, has been negotiating for eight months with the so-called troika of the European Commission, the European Central Bank and the International Monetary Fund over the terms of a bailout that could equal the size of its near 18 billion-euro ($24 billion) economy.

“If Anastasiades wins, he already has the strong backing of Merkel and has been making all the right noises,” Fiona Mullen, director of Sapienta Economics in Nicosia, said in an e-mail response to questions. “His main task will be to negotiate on what concessions Merkel wants to extract from Cyprus so that she can get the bailout through the German parliament.”

Merkel’s government, in charge of Europe’s biggest economy and the largest contributor to euro-area bailouts, insists that Russia contribute to any bailout, arguing that Russian capital, legal or illegal, dominates the bloated Cypriot banking system.

Money Laundering

While Germany won’t stand in the way of aid if Cyprus fulfils the criteria for help, questions need to be addressed on the future size of the country’s banking industry, tax policy and how Cypriot authorities deal with money that may be illegally sent into the island, Deputy German Finance Minister Steffen Kampeter said in an interview.

Cyprus, which became the fifth euro-area member to request international aid in June 2012, has been shut out of debt markets for almost two years, with lenders including Bank of Cyprus Plc and Cyprus Popular Bank Plc losing 4.5 billion euros in Greece’s debt restructuring last year. Cyprus needs the bailout to recapitalize its lenders as well as to finance the government over the next three years.

Standard & Poor’s said in a Feb. 20 report that there’s a one-in-three chance it may cut its long-term debt rating for Cyprus again this year if the aid isn’t forthcoming.

Cyprus Ratings

“We would also lower the ratings if we believe the authorities aren’t able to fulfil the conditions that would be attached to an official assistance program,” Moritz Kraemer, head of sovereign ratings at S&P, said in the report. S&P’s current rating for Cyprus’s long-term debt is CCC+, seven steps below investment grade.

Anastasiades and Malas agree on the need for Cyprus to sign an international aid deal, saying there is no alternative. Both also say that there’s room for re-negotiation and that Russia should be involved in a Cypriot bailout.

Reaching agreement with Russia on contributing to a rescue will be an “immediate priority,” Anastasiades said Feb. 21. Malas said in an interview that he will “strongly” encourage Russia to get involved in financing Cyprus.

European leaders will have to discuss ways to raise “serious loans” to repay Cyprus government debt because “no one needs a cataclysmic situation -- not Europe, not Russia and obviously not Cyprus,” Russian Finance Minister Anton Siluanov said in a Feb. 14 interview.

Russian Restructuring

While Russia is willing to contribute, “the main support for Cyprus should of course come from the countries in the European community,” Siluanov said. Russia remains willing to restructure a 2.5 billion-euro loan it provided in 2011 and possibly agree to a lower interest rate, though “that still won’t solve Cyprus’s debt problem,” he said.

One issue dividing the presidential candidates is the demand that Cyprus consider a privatization program for state-owned companies to restore debt sustainability. Anastasiades has said state-asset sales are something he could agree to only if necessary, while Malas opposes them altogether.

“If they continue to run the economy as Christofias did, we’re all going to close down,” Sophoclis Sophocleous, 62, the owner of a construction material import business, said in an interview in Nicosia. “We need a change.”

Voting opens from 7 a.m. local time until 6 p.m., when the first exit polls are due. An initial estimate of the final result will be published around 8.30 p.m.

A change in government in Nicosia, the Cypriot capital, is unlikely to trigger an immediate resolution of the problem as “the main political challenge to a deal lies elsewhere,” Alexander White, European political analyst at JPMorgan Chase & Co. in London, said in a Feb. 19 note. “A deal in March or April is certainly possible, but given the complexity of the issue in Germany, and elsewhere, this may be optimistic.”

As Cyprus is facing a funding cliff, with bonds worth 1.4 billion due to mature on June 3, the euro region may find some form of short-term financing that would push the debate beyond German federal elections due on Sept. 22, White said.