The meeting of euro-area finance ministers in Luxembourg discussed financial aid for Spain, Greece’s implementation of the bailout programme and Cyprus, the latest eurozone member to jo in the list of debt crisis victims.
The Eurogroup meeting started at around 5pm, Cyprus time. Developments in Cyprus, Portugal and Ireland were the fourth item on the agenda of the meeting, which was expected to go on until late.
Cyprus needs some €1.8 billion – about 10 per cent of its GDP – to recapitalise the Popular Bank by the end of next week. But analysts say Cyprus may need as much as €5 billion over a period of two years to cover a bailout for other banks as well.
The government has displayed a reluctance to borrow from the EU bailout fund, the EFSF, for fear of strings attached and potentially unpopular fiscal austerity eight months before a general election.
While the finance minister faced his European counterparts in Luxembourg, in Nicosia the government spokesman said the administration is in negotiations with the European Un ion for a possible rescue package, while it also looks into the prospect of loans from an individual nation.
“We are in continuous contact and dialogue with the European partners and the EU’s institutions, and are working simultaneously in the direction of securing a bilateral loan from another country,” Stefanou said in a statement.
Brussels has recommended that Cyprus bring its government deficit to below 3 per cent of GDP “in a credible and sustainable manner” by the end of 2012. In a press release, the European Commission said it welcomed the ambitious expenditure-driven consolidation strategy adopted by Cyprus.
It noted moreover that its 2012 Spring Forecast projects Cyprus’ fiscal deficit to narrow to 3.4 per cent of GDP in 2012 and 2.5 per cent in 2013. “On this basis, and in view of economic activity contracting this year, the government debt-to-GDP ratio will still remain on a rising trend and reach about 76% in 2012,” the Commission added..
Cypriot authorities have announced they will propose a new package of measures with a fiscal impact of about 1 per cent of GDP for 2012, to be adopted by parliament by the end of the month.
The island has been shut out of markets since May last year, and is pursuing a loan from other nations, including Russia and reportedly China, and also considering requesting aid from the euro-area’s funds in order to finance the recapitalization of its banking sector, hurt in writedowns of Greek government debt held by banks.
Should the Russian loan come through, the country could use that agreement to improve its bargaining position with its euro-bloc partners.
If euro-area cash comes with too many conditions attached, Cyprus would have other options, the finance minister told newsmen on Wednesday. “Your negotiating position in talks with the European Un ion is much better when you have a bilateral loan already approved,” Shiarly said.
Citing unnamed senior Cypriot sources, Reuters reported yesterday that Cyprus has applied for a bilateral loan from Russia, shortly after Russia’s Deputy Finance Minister had said no formal request for aid had been made.
“A political approach was made (to Russia) and we are expecting a response,” the Cypriot official told Reuters on condition of anonymity.
“We have applied on a political level…an application has been made, no doubt about it,” the same official said.
Last night the state broadcaster’s Moscow correspondent suggested the Russian government’s response to the request might be expected today.
It’s understood that talks with the Russians over a loan have been going on in earnest for at least a week.
Earlier this week, global intelligence bulletin Stratfor reported that the Kremlin hopes to use its large liquidity reserves as leverage to develop a substitute naval base in Cyprus. Stratfor said Cyprus’ strategic importance has grown in the past year as unrest in Syria threatens Russia’s regional military foothold at the Syrian port of Tartus, Russia’s only Black Sea Fleet base in the Mediterranean Sea.