Merkel Signals Readiness for Cyprus Solution If Banks Contribute

German Chancellor Angela Merkel signaled a willingness to keep Cyprus in the euro after the island parliament’s rejection of a levy on deposits, so long as Cypriot banks contribute to the country’s financial rescue.

Merkel, speaking to reporters in Berlin today after briefing German lawmakers, said that she “regrets” the vote by Cypriot lawmakers and “respects” their decision. Yet at 17 billion euros ($22 billion), Cyprus’s financial needs are almost equivalent to the country’s entire economic output, a magnitude of bailout that has never been awarded before, she said.

“And therefore, we’re of the opinion that the bank sector must contribute to the sustainability of Cypriot debt,” Merkel said. All the same, “Cyprus is our partner in the euro area and therefore we are obliged to find a solution together.’

European policy makers are weighing how far to push Cyprus after plans to levy 5.8 billion euros ($7.5 billion) from bank deposits to contribute to a 17 billion-euro aid package was thrown out. Stocks and the euro gained today as investors speculated that the European Central Bank will continue to support Cyprus’s banks.

Merkel said that it is now for Cyprus to make recommendations to the so-called troika of the ECB, the International Monetary Fund and the European Commission.

“I’ll say politically, however, that it’s important that Cyprus has a sustainable banking sector,” Merkel said. “Right now the banking sector isn’t sustainable and has come under enormous difficulties because of its business model. It’s our obligation, if we want to provide ESM assistance, that we make sure there is a permanent solution,” she said, referring to the European Stability Mechanism.

“We’ll negotiate further and we say that means primarily the troika and we will have great respect for and will look at the proposals Cyprus makes,” Merkel said. “Germany too, of course, wants a solution.”

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