Friday August 1, 2014 Search
Weather | Athens
31o C
24o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
To get bailout, Cyprus must launder its reputation

By Megan Greene

For months now, the euro area and other international creditors have been debating whether to bail out tiny Cyprus, which accounts for just 0.2 percent of the currency zone’s economy. Why the holdup?

International creditors have said the stumbling block is that they are looking for a way to bail out the country without putting it on an unsustainable debt path. The real problem, though, is German elections in September: Many Germans believe Cyprus is one big money laundromat for Russian crooks, and proposing to bail them out is not a vote winner.

The debt implications of a Cyprus rescue certainly look alarming. Unless the country gets financing by June, when the government has to pay a 1.4 billion-euro ($1.9 billion) bond redemption, it will default. By most estimates, preventing this would require a bailout of about 17 billion euros, from which 10 billion euros would go to recapitalizing the island’s banks.

Spread out over four years, lending Cyprus this amount of money would push the country’s public-debt burden to a whopping 140 percent or 150 percent of gross domestic product in 2016, from 84 percent of GDP last year.

Concerned about the sustainability of such a burden, international creditors have been looking for ways to reduce the size of the bailout. One option mooted is to reduce the state’s funding needs by writing down private creditors’ holdings of Cypriot sovereign bonds. Another is to reduce the funding needs of commercial banks, by writing down uninsured deposits.

Both ideas are problematic. Most Cypriot government bonds are held by domestic banks that already need recapitalizing, so forcing a debt writedown would simply rob Peter to pay Paul. And trying to trim the size of a bailout by gunning for bank depositors is a high-risk strategy -- if depositors elsewhere in the euro area feel the same could happen to them, they will withdraw their money, risking renewed havoc for weak banking systems, such as those in Ireland, Spain and Italy.

More important, the proposed remedies are unnecessary. Their starting assumption -- that a bailout would put Cyprus on an unsustainable debt trajectory -- is wrong.

The difference between Cyprus having a public debt-to-GDP of 150 percent versus 122 percent -- the target that creditors have set for Greece -- would be about 5 billion euros. Conservative estimates for privatization revenue over the next few years are roughly 1.5 billion euros, so the financing gap would be smaller still. Greece has been granted until 2020 to reduce its debt to 122 percent of GDP. If Cyprus were granted the same leniency, it could surely generate the savings to plug this gap.

Furthermore, Cyprus is relatively well placed to start bringing its debt levels down. For 2012, its primary budget deficit is estimated to come in at about 2 percent of GDP. To stabilize its public-debt burden at 150 percent of GDP in 2016, Cyprus would need to generate a primary surplus of about 3.5 percent of GDP that year. This should be achievable. According to a November 2012 draft memorandum of understanding between Cyprus and international creditors, Cyprus agreed to implement measures that would produce a primary surplus of 4 percent of GDP by 2016.

Germany’s election campaign presents a much tougher obstacle to bailing out Cyprus. Last November, the popular German publications Der Spiegel and Bild ran articles presenting Cyprus as a center for Russian money laundering and tax evasion. The main German opposition parties -- the Social Democrats and the Greens -- saw an opportunity to grab votes by claiming to defend German taxpayers from having to bail out Russian oligarchs. Germany’s government may need the support of these two parties to get a bailout for Cyprus through parliament.

The ruling Christian Democratic Union has been sounding tough on the issue, too, no doubt also with a view to the September poll. Last week, Finance Minister Wolfgang Schaeuble said Germany was looking for answers as to why capital flows between Cyprus and Russia are so large. He also questioned whether Cyprus was of enough systemic importance to the euro to be worth rescuing.

The best way to find a solution for Cyprus is to address German concerns about Russian money in Cypriot banks, admittedly not an easy task. Still, it should be possible. According to the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, Cyprus was already more compliant on anti-money-laundering measures than Germany in 2011. In its negotiations with international creditors, Cyprus has agreed to further strengthen its anti-money-laundering framework.

In addition, pressure on Germany from other euro-area countries and European Central Bank President Mario Draghi to fall into line and agree to a bailout is growing. And Russia, which already lent Cyprus 2.5 billion euros in 2011, may be willing to do more, assuaging concerns that a euro-area bailout would give the Russians a free ride.

If Cyprus wants a bailout, the best thing it could do is come up with a grand political gesture to address the perception that it is being used for money laundering and tax evasion. It is in everyone’s best interests that this happens, preventing a messy default or a bailout that sets dangerous precedents.

[Bloomberg]

*Megan Greene is a Bloomberg View columnist and chief economist at Maverick Intelligence. Until 2012, she was director of European economic research at Roubini Global Economics LLC. The opinions expressed are her own.

ekathimerini.com , Monday February 4, 2013 (12:51)  
Greek bond yields dip as investors anticipate ratings upgrade
Greek exporters worried about impact of Russia sanctions
Traders unhappy with turnover
No rivals for Intralot as it bags racing bet permit
Jean-Claude Juncker to make first official visit to Athens on Monday
European Commission President-elect Jean-Claude Juncker is expected in Athens on Monday, where he will be meeting with Greek Prime Minister Antonis Samaras, the Commission announced on Frida...
Britons stranded at sea off Zakynthos towed to safety
Four British tourists who went missing late on Thursday off the coast of the Ionian island of Zakynthos were found safe and sound in the early hours of Friday. The group of Britons had hired...
Inside News
SOCCER
One win and one loss in Europa League
Greece had a hit and a miss in the first-leg games for the third qualifying round of the Europa League on Thursday, as Atromitos scored a 2-1 win at Sarajevo while Asteras Tripolis lost 1-0 ...
SOCCER
Goalless draw at Liege puts Greens in driving seat
Panathinaikos got the upper hand in the battle for entry to the Champions League playoffs after snatching a goalless draw at Standard Liege on Wednesday. If anything, the Greek cup holders m...
Inside Sports
COMMENTARY
In trying to conquer, Putin unites Europe
President Vladimir Putin is obliged to feign indifference to the sanctions that the European Union and the United States imposed on Russia this week. But, being the player that he is, he mus...
EDITORIAL
Our own worst enemies
A new study has come to exemplify the cliche notion that Greeks find it easier to excel abroad, where they fare much better than they do at home. According to research by epidemiologist John...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
 RECENT NEWS
1. Jean-Claude Juncker to make first official visit to Athens on Monday
2. Britons stranded at sea off Zakynthos towed to safety
3. Greek bond yields dip as investors anticipate ratings upgrade
4. Human rights watchdog criticizes decision to file Farmakonisi case
5. Greek exporters worried about impact of Russia sanctions
6. Greece evacuates embassy staff, foreign nationals from Libya
more news
Today
This Week
1. Greece evacuates embassy staff, foreign nationals from Libya
2. Greek exporters worried about impact of Russia sanctions
3. Human rights watchdog criticizes decision to file Farmakonisi case
4. Greek bond yields dip as investors anticipate ratings upgrade
5. Britons stranded at sea off Zakynthos towed to safety
6. Jean-Claude Juncker to make first official visit to Athens on Monday
Today
This Week
1. Wine cup used by Pericles found in grave north of Athens
2. Quadriplegic woman on life support 'dies due to unpaid power bills'
3. Defense Minister Avramopoulos to represent Greece at European Commission
4. World’s largest solar boat on Greek mission
5. Greece names fifth privatization agency chief in four years
6. What lessons can we draw from antiquity?
   Find us ...
  ... on
Twitter
     ... on Facebook   
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright © 2014, H KAΘHMEPINH All Rights Reserved.