FINANCE

Is Cyprus the next euro bailout candidate?

Cyprus is set to take over the EU presidency as of July 1. But the island republic could be next in line for insolvency, as credit agencies recently announced a significant downgrade.

Two of the world's three main credit rating agencies handed Cyprus a downgrade last month, citing Cypriot banks' connections to Greek debt as the most significant reason.

Fitch on May 22 downgraded to junk status some bonds of Cyprus' three main financial institutions: Cyprus Popular Bank, Bank of Cyprus and Hellenic Bank.

Two days later, credit agency Moody's downgraded Cyprus Popular Bank's rating, as well.

Banking and politics continue to be closely bound in Cyprus. Among the peculiarities in Cyprus' political landscape, communist president Dimitris Christofias continues ruling with support from a nationalist party, while the Europe-friendly, conservative opposition has been building connections with the socialists - which could offer a presidential bid next year.

Ruling communist party AKEL warns about excessive spending cuts, with spokesperson Giorgos Loukaidis on Cypriot television adopting a wait-and-see attitude toward Greece.

Despite their differences, Cypriot politicians agree that the country's finances are a priority - although they disagree on the best way to go about setting them in order.

Pragmatic communists

Loukaidis said that imposing austerity measures on citizens would likely worsen the problem, pointing out that in the two years of their implementation in Greece, debt has increased from 115 percent to 165 percent of the gross national product.

President Christofias belongs to the ruling communist party

"The main problem is the banking crisis, rather than too-lax financial policies or structural problems in the economy," he said.

The Cypriot communists supported - along with all of the other parties - using state help to recapitalize the Cyprus Popular Bank.

In a television interview, Loukaidis said the party's main purpose was to avoid disaster for the country's second-largest financial institute, which is also known as Laiki Bank.

"Bankruptcy would have had fatal results for the banking system, as well as for the entire economy," said the party spokesperson.

Help from Brussels

By the end of July, Laiki Bank needs an injection of 2 billion euros in order to fulfill European banking authority requirements.

But since Cyprus doesn't have its own money to recapitalize the bank, alternatives include asking for assistance from Brussels, to get loans from Russia or to tap Greek bailout funds.

Speaking on television, conservative parliamentarian Christos Stylianidis said assistance from European bailout funds is the best option.

"The government should set its sights on an EFSF [European Financial Stability Facility] loan, in order to save Cyprus' reputation as a financial center," the opposition politician said.

Rating agencies issued the downgrade last month

"We must give a clear signal that we submit ourselves to strict financial discipline," Stylianidis added.

Christofias had to reorganize his cabinet in 2011 after rumors emerged about a possible request for help from Brussels.

Budget problems emerged for Cyprus partly because the country was forced to lay out 2 billion euros to repair damage to energy infrastructure caused by a devastating explosion at a coastal ammunitions depot, in which 13 people died.

Solvency is the goal

Stylianidis thinks this should be another reason for fiscal discipline, emphasizing that Cyprus cannot afford doubts as to its solvency if it wants to remain a relevant provider of financial services.

On state television, he argued for speedy ratification of the European fiscal pact, saying this would revalue Cypriot bonds. "If we just push the problem under the carpet, Greece's fate will befall us," he warned.

The clock has been ticking since the downgrade last month. However, Cyprus' government remains optimistic, even planning for a balanced budget by 2014.

Author: Jannis Papadimitriou / sad
Editor: Greg Wiser