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Cypriot report Cypriot report
by Euro Reporter
2013-01-12 11:44:33
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Banking reforms urged

Cyprus will have to take steps to tackle money laundering and improve the transparency of its banking sector to secure an international bailout deal that may have to wait until at least March, several top European officials signaled Friday. Arriving at this seafront city for a conference of the European People's Party, the center-right political group of the European Parliament, officials from across the region said it may be better to leave negotiations for an international bailout to the new government that will be formed after Cyprus's general election in February. They outlined their views on a time frame even as one of the world's biggest credit rating companies, Moody's Investors Service, downgraded Cyprus's debt and said the country is moving closer to default. The conference is hosted by Cypriot conservative opposition leader Nikos Anastasiadis, who is vying for the premiership. His European counterparts expressed support for Mr. Anastasiadis, with German Chancellor Angela Merkel saying she hopes he wins. Cyprus's President Dimitris Christofias, a communist, initially resisted agreeing to tough austerity measures typically attached to an international bailouts, and for months pursued what turned out to be a fruitless bid to get another loan from Russia. "It may fall to the new government" to sign a memorandum of understanding with the euro zone and the International Monetary Fund for financial assistance, Irish Prime Minister Enda Kenny said on his way into the talks.

Euro-zone finance ministers had earlier indicated they would discuss Cyprus's bailout at their meeting on Jan. 21, after they receive a final outside assessment on the banking sector's needs. Pimco, an investment company, is due to present its findings on the sector in mid-January. The officials' comments underscore the difficulty of putting together a rescue package for the tiny island nation amid concerns that the new loans will render its debt unsustainable, and as several governments appear reluctant to aid Cypriot banks, expressing concern that Cyprus may be serving as a tax haven for Russian companies and individuals. Cyprus was forced to seek international aid in the summer after its banks suffered heavy losses in a Greek debt restructuring. Under the latest estimates, the entire bailout may need to be more than EUR17 billion ($23 billion) and would catapult the country's debt to well above 100% of its economic output, a level that is generally considered unsustainable. The country has avoided defaulting on its debt over the past few months by forcing state-owned organizations to lend their cash reserves to the government, according to government officials. On Thursday, Moody's slashed its rating for Cyprus by three notches to Caa3, just two steps away from default, saying that a growing burden of bad debts for the country's banking sector has pushed the likelihood of default to 50%. In a sign that the country may get some reprieve for part of its debt, Russian Finance Minister Anton Siluanov said Friday that Russia could consider easing the repayment terms on an existing EUR2.5 billion loan to Cyprus. Conservatives party leaders--many of whom are also government leaders--meeting on this Mediterranean island Friday will "naturally" discuss the country's economic "situation," Germany's Ms. Merkel told reporters on the margins of the EPP conference.

Discussions "are far from the stage when decisions are made," she said. Any financial aid would require Cyprus to agree to adopt tough economic reforms, the chancellor said. Some members of the parliamentary opposition in Germany, including members of Ms. Merkel's own bloc, want to see Cyprus make a more serious effort to tackle money laundering before a bailout can be approved. "The issue of bank transparency is among issues that Cyprus certainly needs to tackle as part of structural reforms," German Foreign Minister Guido Westerwelle said in Berlin Friday. European Union Economic and Monetary Affairs Commissioner Olli Rehn also joined those urging the country to tackle money laundering urgently. "Cyprus has enacted several laws against money laundering in recent weeks and months," Mr. Rehn said in response questions from an audience at a Brussels think-tank gathering earlier. "The crucial thing is implementation, to ensure this is not a problem on the island. It's important Cyprus reforms its financial sector in line with European principles. Then we will work alongside Cyprus as we did in Spain." German politicians have also been increasingly critical of what they say are Cypriot banks' connection to Russian oligarchs. ECB data show that nearly 30% of all Cypriot bank liabilities are deposits from nonresidents of the euro zone. Central Bank of Russia figures show that the country has transferred between $2 billion and $8 billion a quarter to Cyprus in the last three years, a large part of which the bank describes as "recycling of earnings." Cyprus's ties with Russia are evident in Limassol, where businesses and services catering to Russians are prevalent. Along the city's coastal road, lined with palm and cedar trees, shops sell Russian products from the daily newspaper Pravda to fur coats.

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Torn between strong allies over bailout money

Eurozone finance ministers reportedly won't approve a final bailout deal for Cyprus until after February elections there. The vote is expected to bring to power a conservative who will do everything that the current communist president is refusing: cut public sector jobs, slash wages and, above all, privatize public services. Everyone in the Cypriot government but president Demetrios Christofias agreed in November to austerity measures proposed by the European Union and International Monetary Fund. The delay is terrible for Cypriot banks, which were hit hard by the Greek debt crisis and are desperate for recapitalization funds. Worsening matters is Russian leader Vladimir Putin's call to repatriate $1 trillion of Russian cash abroad. At least one fifth of the deposits in Cypriot banks are Russian.

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Could Cyprus bring down the Euro?

The idea that little Cyprus – population 1.1 million; that’s fewer than Dallas, Texas – could fracture the euro zone sounds ridiculous, and probably is, but it’s not impossible and it’s something that’s being talked about. The argument was summed up earlier this week by Marc Chandler, the well respected global head of currency strategy at Brown Brothers Harriman in New York. In a research note headlined ‘Why Cyprus is Important,’ he wrote that Cyprus may be the most pressing issue for the euro zone. “Yes it is small and few international investors have any exposure. However, its significance extends beyond its size,” he said. Mr. Chandler then outlined four main issues: the amount of assistance Cyprus needs is still not determined. Reports in the German media at the end of last year warned that Cypriot banks have been used to avoid taxes and launder, primarily Russian, money. Fissures are evident between the European Union, the European Central Bank and the International Monetary Fund on how to deal with Cyprus. And, finally, the EU has been accused of playing political favorites in its dealings with Cyprus.

This is how Mr. Chandler summarized his paper: “While last year we argued against the widespread view of a Greek exit, we are not as sanguine about Cyprus… We suspect the risks of a Cyprus exit are greater than currently appreciated.” Nervousness about Cyprus was increased this week by an article in Germany’s Der Spiegel reporting that the urgently-needed bailout of the Cypriot banking industry is in danger of being vetoed by the German parliament. This increased further when Moody’s Investors Service Thursday cut its rating of Cyprus three notches, saying a growing burden of bad debts for the country’s banking sector has pushed the likelihood of default to 50%. This is how our own Berlin reporters summarized the problem: “German political leaders are increasingly expressing reservations about providing bailout aid for Cyprus’s ailing banks, calling into question whether the German parliament would vote to approve an aid package for the financially troubled nation,” they reported.

So what’s the view from Cyprus itself? “I think the numbers are so small relative to what the EU has committed elsewhere that I doubt they would endanger the entire euro edifice over this tiny nation,” said Marshall Gittler, head of global foreign exchange strategy at IronFX, who is based in Limassol. If Cyprus works out a method to extricate itself and reinstate its previous currency, that would establish a precedent, and the risk of other countries using that template would escalate dramatically, Mr Gittler said. “It would be the Lehman Bros. of the euro zone; not that significant for the markets by itself but a game-changer for what it means for official policy in the future. Having committed hundreds of billions to backstop the other euro-zone nations, I can’t imagine they would begrudge Cyprus a sum an order of magnitude less to put it on a sound footing. The risk/reward balance is overwhelmingly in favor of supplying the money sooner or later,” said Mr. Gittler. And that’s almost certainly true. Germany and the other richer euro-zone nations will in all likelihood provide the money in the end as the principle that it’s impossible to leave the euro zone, having joined, will be deemed more important than spending a few billion euros more. But German approval will not be easy to reach. “As things currently stand, I can’t imagine German taxpayers bailing out Cypriot banks, whose business model depends on abetting tax fraud,” Sigmar Gabriel, chairman of the opposition Social Democrats, told the Süddeutsche Zeitung in an article published earlier this week. If German Chancellor Angela Merkel “wants SPD support for a Cyprus aid package, she will have to have excellent arguments. At the moment, however, I don’t see what those might be.”



         
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Emanuel Paparella2013-01-12 15:20:45
Obviously there are different visions, assumptions and templates of economic prosperity and they create friction and dissension in a union. But beyond the union of the euro, any viable polity would be able to overcome those centrifugal forces by the appeal to solidarity and what all its members share in common: their cultural heritage and identity. When such an identity has been trivialized and reduced to common soccer games on Sunday and banal consumerism the rest of the week, then the center will fail to hold and the centrifugal forces will take over.

To begin to realize the fallacy of the statement “now that we have made the EU we need to make the Europeans,” a fallacy that the EU founding fathers would certainly have discerned, could be a first step toward sanity and true “enlightenment,” for it would be equivalent to admitting that the cart has been put before the horse, and perhaps a turn around of sorts may still be possible. To change the metaphor slightly, it’s like saying “my mother, drunk or sober,” to express the love for one’s mother, but if one’ s mother happens to be a drunkard then the first essential requirement is to acknowledge that much and then, because one loves her, proceed to do what is necessary to help her. Likewise, it remains to be admitted that the cart has been put before the horse and that not knowing one’s heritage in depth may result in running the risk of throwing out the baby together with the dirty bath water.


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