|Debt-laden Cyprus set to pay heavy price for EU resuce funds
After nine months of stop-start negotiations, cash-strapped Cyprus is on the verge of securing a 17 billion euro EU bailout but analysts say it will come at a hefty price.
Euro zone finance ministers are to meet tomorrow after a two-day EU summit in Brussels, to thrash out a bailout plan for Cyprus.
“The longer this has gone on, the more drastic the proposed measures have become, the craziest idea being a haircut on deposits, which would only ensure that EU taxpayers never get their money back,’’ analyst Fiona Mullen told AFP.
The government has dismissed any suggestion of a haircut on bank deposits. But to seal an agreement, the new government has had to cross red lines on the island's low corporate tax rate and on the sale of profitable state utilities.
“It looks like it will have to accept an increase in the corporate tax rate to 12.5 percent, which until now was the lowest in the euro zone at 10 percent,’’ said Mullen.
“And of course privatization used to be taboo, but they will not get a bailout without it.’’
She said Cyprus may also have to accept more “damaging taxes,’’ such as the financial transaction tax, which will hit the big foreign exchange trading companies.
Cyprus requested financial assistance from the EU in June last year after its two largest banks – Bank of Cyprus and Popular Bank – sought state aid following massive losses resulting from a Greek debt haircut.
With the island's banks being the most exposed to Greek debt, Cyprus simply could not afford to agree a 75 percent write-down of its bond holdings.
As part of a rescue package last year, Greece obtained a partial reduction in debt owed to private creditors, including Cypriot banks.
Cypriot President Nicos Anastasiades has pushed for this to be taken into account in talks with international creditors on the island's own bailout, which has been earmarked for the end of March.
The Cyprus financial rescue has proved to be the most difficult to conclude.
The government tried to avoid the harsh terms of an EU bailout by asking Russia and China for bilateral loans. But as the amount required soared, it became clear that the European Commission, the European Central Bank and the International Monetary Fund was the only institution with the resources to help.
The mooted 17-billion euro bailout figure is roughly the same as the island's total economic output, and would increase debt to more than 140 percent of gross domestic product, a level considered unmanageable in the long run.
The island's Simerini newspaper said Cyprus had been told to find seven billion euros of the 17 billion euros it needs because lending the government more than 10 billion would make the debt unserviceable.