By Rainer Buergin

Germany’s Finance Ministry said that Cyprus can only access international aid if it threatens the euro area’s stability, resisting European Central Bank warnings that the island economy might derail progress made in Europe.

Providing aid from the euro region’s financial backstops is linked to conditions that must be respected, Finance Ministry spokesman Martin Kotthaus told reporters in Berlin today. It is a legally binding condition of aid that Cyprus is deemed to be systemically relevant to the 17-nation euro area, so the question “must be asked,” he said.

The German focus on Cyprus’s obligations contrasts with ECB Executive Board member Joerg Asmussen, who told Greek newspaper Kathimerini yesterday that policy makers must realize Cyprus has the potential to cause damage beyond the size of its economy.

“If one simply looks at the size of the economy -- it is something like 0.15 percent of euro-area GDP -- they may conclude that Cyprus is not systemically important,” Asmussen, a former deputy German finance minister, told Kathimerini in comments confirmed by the ECB. “In normal times, one may be tempted to agree. But I think we are still not in normal times, and therefore I think that disorderly developments in Cyprus can harm the progress we made in Europe in 2012.”

ECB President Mario Draghi pressed German Finance Minister Wolfgang Schaeuble to recognize that Cyprus and its banks are a risk for the euro region as a whole, Der Spiegel reported in this week’s edition, without saying how it got the information. Schaeuble rejected the notion that Cyprus’s woes are “systemically relevant,” prompting Draghi to argue that this was a question for economists, not lawyers, the magazine said.

The so-called troika of the ECB, the International Monetary Fund and the European Commission must determine jointly that the situation in Cyprus is a threat to the euro region’s stability for the Mediterranean country to qualify for aid, Kotthaus said. Euro-region finance ministers will probably discuss a program for Cyprus at their meeting in March, based on analysis provided by the troika, the Finance Ministry said separately.

Asmussen said that a “bad development” in Cyprus could result in two kinds of developments. “One is possible contagion of Greece via banking channels, since a number of Cypriot banks are active in Greece,” he said. “Secondly, it can send the wrong signal to the rest of the euro area,” with countries such as Portugal and Ireland preparing to re-enter capital markets.

[Bloomberg]