Cyprus bailout request another hurdle for eurozone

With empty state coffers, ailing banks and badly in need of a multi-billion-euro loan, the small island of Cyprus is like a drifting ship quickly running out of fuel. When Cypriots head to the polls in a run-off vote on Sunday, they will choose a president tasked with pushing a request for a European bailout, which Nicosia first made last year.

At stake is not just the threat of bankruptcy for Cyprus. Many observers believe that, unless a solution is found soon, the island’s cash problems could reignite the eurozone crisis.

Both Cyprus and the EU have a role to play, said Andreas Theophanous, a Nicosia University professor of political economy and head of its Centre of European and International Affairs. The crisis “requires new approaches domestically as well as the support and the solidarity of the European Union,” he said. “However,” he warned, “the Eurogroup, amidst a political power struggle among member states and EU institutions, is pursuing policies (with Cyprus) that may create problems for the stability of the eurozone as a whole.”

As Nicosia quickly runs out of cash, a bailout is proving difficult to clinch. Virtually all options on the table to avoid a default have obstacles attached as European policy makers struggle to restore investor confidence. Compared to the hundreds of billions of euros used to prevent Greece, Ireland and Portugal from collapsing, the 17.5 billion euros needed for Cyprus’ banks and state coffers, is a relatively small sum.

But in real terms, the loan is equal to the island’s entire economy, and many fear it will never be paid back. With the risk of an unsustainable loan, said Theophanous, “it will be essential to consider other arrangements, such as the bank capitalisation being handled by the European Stability Mechanism.

Cyprus bailout talks have also hit obstacles in recent months over allegations that the country’s banks are a hub for money laundering and tax evaders. As a condition for resumed talks, the new president will come under pressure to accept an audit of deposits held by non-EU citizens following reports that Russian oligarchs, mafia and corrupt officials have stowed 26 billion dollars in Cyprus. Germany has insisted that Moscow, given its large investments on the island, should make a contribution to any bailout.

Nicosia will need to pay back a 2.5-billion-euro loan it took out last year from Russia in 2016. Cyprus has requested from Moscow to extend the loan to 2022. European Central Bank chief Mario Draghi has said that a rescue package for Cyprus must come with close and continuous monitoring of its progress in fighting money laundering.

Cyprus has already implemented some austerity measures demanded by the troika of creditors, the European Commission, European Central Bank and International Monetary Fund. These have included wage cuts for civil servants, but Nicosia has balked at other steps such as the privatising of state-owned companies as well as carrying out major pensions’ reform.

But even if Cyprus made more cuts and sold stakes in its state power and phone companies, many analysts insist, it still would be unable to cut its high government debt to a sustainable level. Public debt is set to top 140 percent of GDP with a bailout. There have been other radical proposals, such as restructuring the nation’s sovereign debt and imposing losses on uninsured depositors at banks.

But these have been rejected by Cypriot and EU officials, who fear they would hurt fragile market confidence and raise the risk of bank runs in other troubled EU states. Even Moody’s credit agency has warned that imposing losses on depositors as part of Cyprus’ bailout would affect the ratings of European banks in general.

But for all its problems, Nicosia still has an ace up its sleeve, deep under the sea off its coast: Natural gas, an estimated 60 trillion cubic feet of which lie south and south-east of the island. Cyprus has already received some 200 million euros for oil and gas exploration licenses from international energy companies. “Cyprus has significant reserves of natural gas,” said Theodore Couloumbis, international relations professor at Athens University. “So there is the potential, although not immediate, to reap from the benefits and help pay-down the debt.”