BRUSSELS — European policymakers are split over how to handle a bailout of Cyprus, with Germany and some other countries pushing for bank depositors to bear part of the cost and many other member states worried that such a move will cause a bank run.
Euro zone officials say momentum has built in recent days behind the idea of “bailing-in” Cypriot bank shareholders and depositors, although the specifics of how such an operation would be carried out have not been pinned down.
Discussion over the bailout will resume in earnest this week following the election of Nicos Anastasiades as Cyprus’s new president on Sunday.
Germany, Finland and the Netherlands are among those who say taxpayers cannot be expected to go on financing euro zone bailouts, saying it is time for owners and depositors in risk-laden banks to accept losses on investments.
The concern is that announcing such a move will provoke the immediate, large-scale withdrawal of deposits from all Cypriot banks, where a large number of international investors, including many Russian and British companies, hold accounts.
Euro zone finance ministers will discuss options at a meeting in Brussels on March 4, but no decisions are expected, officials say, making a further meeting later in March likely.
Thomas Wieser, who heads the group of senior officials who prepare decisions of euro zone finance ministers, told Reuters last week an international bailout should be ready by the end of March.
While Cyprus is the euro zone’s third smallest economy with annual GDP of only around 18 billion euros, a bank run could have repercussions across the single currency bloc and re-ignite the debt crisis, officials warn.
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“We have to consider that risk,” said one euro zone officials whose country is undecided about whether a bail-in of depositors is the right course of action. “It’s a real option, but some countries don’t want it.”
The difficulty with Cyprus is finding a way to make a bailout sustainable so any money leant to it is repaid.
The island needs up to 17 billion euros, including 8-10 billion to recapitalise its banks and 7 billion to repay loans and finance ongoing government operations. That is equivalent to virtually its entire annual GDP.
Such a rescue would increase Cyprus’s debts to around 145% of GDP, a level considered unsustainable. Greece’s bailout calls for it to cut its debt-to-GDP ratio to 120% by 2020, but that would also be unsustainable for Cyprus.
The International Monetary Fund and EU finance officials say Cyprus needs to cut its debt to 90-100% of GDP before the country is capable of paying back what it owes.
The alternative is to impose losses on investors in Cyprus bloated banking sector, which is more than eight times bigger than the economy. Doing so would greatly reduce the cost of the bank recapitalisation and therefore the overall bailout. —Reuters
