Cyprus Gains Support as EU Seeks to Prevent Crisis Flare

European political chiefs paved the way for finance ministers to wrangle a rescue for Cyprus today as the euro area seeks progress toward a bailout that’s been batted about for nine months.

“I can’t imagine that we’ll let the weekend go by without resolving the Cyprus problem,” Luxembourg Prime Minister Jean-Claude Juncker said early today after euro leaders met midway through a two-day European Union summit in Brussels. The EU gathering ends today with a 27-nation discussion of foreign policy, to be followed by a euro-area ministers’ meeting.

Cyprus requested a bailout in June and a deal on aid has been delayed by debate on how to cut the island nation’s debt. The previous government had rejected key demands by the so-called troika that oversees euro-area bailouts. Yesterday’s summit was the first for new President Nicos Anastasiades.

Finnish Prime Minister Jyrki Katainen said finance chiefs didn’t receive specific instructions from leaders ahead of today’s talks on Cyprus. He reiterated that any deal must offer a path to sustainable debt and include a role for the International Monetary Fund.

“We need IMF in the package because of two reasons,” he said. “We need their know how” and “of course it’s better if there are more payers than just the euro-area countries.”

Leaders yesterday welcomed Anastasiades, elected last month, who pledged “decisive” action to comply with whatever terms are agreed on for his country, the fifth euro-area nation to seek aid. Katainen said yesterday the new government has “more credibility” than its predecessor.

Uncertainty Persists

Austrian Chancellor Werner Faymann told reporters that while finance ministers may be able to reach agreement later today, Cyprus has “a long way ahead of it” to recover from the crisis.

While Cyprus accounts for about 0.2 percent of the euro-region economy, its financial troubles are testing European leaders’ pledges to avoid imposing losses on sovereign investors after the Greek debt restructuring last year. Uncertainty surrounding the bailout risks triggering a new round of market turbulence.

“We said that Greece was a unique case,” Juncker said yesterday. “We didn’t say that those countries who speak Greek are a unique case.”

Euro-area finance ministers aim to reduce the size of a rescue from an expected 17 billion euros ($22 billion) to about 10 billion euros, Dutch Finance Minister Jeroen Dijsselbloem said March 13. He declined to say the exact amount under review, instead citing prior estimates of 10 billion euros to shore up Cypriot banks and 7 billion euros to fund the government.

Final Deal

Dijsselbloem, who leads the group of euro-area finance ministers, met with currency-zone leaders and will return to lead today’s Cyprus talks. A final deal must include ways to reduce Cypriot debt to about 100 percent of gross domestic product, he said.

“It is useless to develop a program if it is impossible for a country to get out of the valley,” he said.

Officials are working to reach a deal this month, EU Economic and Monetary Affairs Commissioner Olli Rehn said.

German Finance Minister Wolfgang Schaeuble said yesterday there’s a willingness to help Cyprus, provided the nation is willing to undertake the necessary reforms.

Addressing ‘Roots’

“The help we give must be a help to self-help which means we must tackle the roots,” Schaeuble said in a speech at Bloomberg’s Germany Day conference in Berlin. “If we tackle the roots then it will be relatively easy to agree on the path, the speed and the time frame.”

Schaeuble reiterated his concerns that the Cypriot banking industry is too large a share of the economy. Germany has led calls for Cyprus to step up anti-money laundering efforts as a condition of receiving aid.

The Cyprus deal shouldn’t be designed in a way that creates problems for other small nations with big banking sectors, Luxembourg Finance Minister Luc Frieden warned earlier this month. He said ministers need to reach a rescue deal quickly so as not to topple the euro zone’s hard won stability. “Several countries find that Cyprus has too big a finance sector, a question that’s of direct interest to Luxembourg as well,” Frieden said. “We are of the view that this cannot be a criteria.”

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