Financial problems of the small island state of Cyprus should not be underestimated, because they could still derail the still fragile confidence in the eurozone, European Central Bank board member Joerg Asmussen told Reuters.
“Disorderly developments in Cyprus could undermine progress made in 2012 in stabilizing the euro area. Cyprus could well be systemic for the rest of the euro area despite its size,” Asmussen said.
Asmussen’s comments came after some eurozone states voiced concerns Cyprus, with gross domestic product of about 0.2 percent of eurozone GDP was not “systemically relevant” to the 17-nation currency bloc, a precondition for a bailout.
“Under normal circumstances one would expect the direct impact of a default to be limited, and it’s obvious that without assistance the country will default,” Asmussen said on the sidelines of a meeting of European Union finance ministers.
“At the same time we should recognize that the situation is not normal. Even though the promise of the OMT and other important decisions have calmed the markets, this situation is still fragile.”
Cyprus applied for financial aid last June after its banks suffered huge losses following an EU-approved write-down of Greek debt, but some states are also uneasy about bailing out a country they say lacks financial transparency.
Asmussen added Cyprus could impact twice-bailed out Greece through banking sector channels and send a negative signal to the rest of the eurozone, especially harming the outlook for those states trying to regain full access to financial markets.
“I expect that a final agreement on a program could be reached at the end of March,” he said. “The program must provide for a close monitoring of the anti-money laundering and tax transparency frameworks and their implementation.” [Reuters]