Speculation is mounting that an international bailout is imminent, but the government has kept markets guessing so far.
The European Commission said yesterday it has not received any request for assistance from Cyprus.
Deputy Europe Minister Andreas Mavroyiannis said €1.8 billion was needed within the next few weeks to recapitalise the Popular Bank but that other banks may need money too.
He said if Cyprus chose to tap the EU bailout mechanism it might ask for more than the €1.8 billion to be on the safe side.
“We are talking about figures that could be €3.0 or €4.0 billion maximum,” Mavroyiannis told Reuters on a visit to Ireland.
Cyprus’ gross domestic product is less than €19 billion.
The country is seeking ways to avoid tapping the EU because of what Mavroyiannis described as the “negative connotation” that comes with it. EU bailouts come with conditions on how to cut debt.
“If we eventually apply, because it is not a given that we will apply (and) there are also other options, we will seek the best possible terms for the economy,” said Central Bank Governor Panicos Demetriades yesterday.
That could be Cyprus’ close ally Russia, or China.
Bilateral lending, which Finance Minister Vassos Shiarly has repeatedly described as “not the preferred option”, is returning to prominence as a likely scenario.
“Everything is on the table,” Mavroyiannis said. “It can be a combination (of bilateral and European money). I don’t know if it will be Russia or China.”
Russia bailed Cyprus out last year through a €2.5 billion loan and is an important business partner.
Asked whether the prospect of bilateral lending was remote, Shiarly told state TV in an interview on Tuesday night: “I would say not.”
The minister remained tight-lipped yesterday on when Cyprus would make its move but he did hint that it would probably be on a weekend.
“I can assure you that when the time is right we will act,” he told reporters. “In most cases the moves are made at the appropriate time, that is, when the markets are closed.”
Cyprus has repeatedly displayed caution about strings which may be attached to any bailout from its EU partners.
Its primary concern is that its cherished 10 per cent corporate tax rate could be compromised. Austerity measures similar to those imposed on other bailed-out states, including Greece, would also force the government into unpopular spending cuts ahead of a general election due by February 2013.
The Central Bank Governor said conditions attached to a possible EU bailout would concern the banking sector and there would not be an additional cost for taxpayers.
“The same goes for a bilateral loan, which will not have any conditions for the government,” he said.
A resort to bilateral lending rather than EU partners could raise eyebrows within the bloc, particularly as Cyprus is poised to assume the European Un ion’s rotating presidency on July 1.
Economist Stelios Platis said the government may be dangling the option of bilateral lending as leverage to potentially extract better bailout terms from the EU.
“They want to exhaust all options and time to find alternative means of finance. In my view it’s an ill-conceived idea that this can be negotiated. It’s (the) wrong strategy, you can’t use this as leverage,” Platis said.
In the television interview, Shiarly reiterated earlier comments that the island would not “wait until the last day” to take action to prop up Popular, either through bilateral lending or by resorting to the European Financial Support Facility.
Popular and the other main bank, Bank of Cyprus (BoC) were hit heavily by the write-down on Greek debt, which was restructured as part of Athens’ second EU/IMF bailout deal. BoC has almost completed its recapitalisation privately.
Cyprus’ main concern now is the large exposure – some €22 billion – the two big banks have in Greece through private loans.
Demetriades said the CB is working on creating a “security ring” around the lenders’ operations in Greece as a buffer against potential negative effects should conditions there worsen.
“Our aim is to create this ring the soonest,” he said, without giving more details.
Meanwhile, Moody’s Investors Service on Tuesday cut its credit rating on BoC, and put Popular on review for a downgrade, citing the increased risks of a possible Greek exit from the eurozone. Cyprus’ third bank, Hellenic was also downgraded.
(Additional reporting by George Psyllides)
By Michele Kambas and Conor Humphries