To Get a Bailout, Cyprus Needs to Launder Its Reputation
February 4, 2013 2 Comments
For months now, the euro area and other international creditors have been debating whether to bail out tiny Cyprus, which accounts for just 0.2 percent of the currency zone’s economy. Why the holdup?
International creditors have said the stumbling block is that they are looking for a way to bail out the country without putting it on an unsustainable debt path. The real problem, though, is German elections in September: Many Germans believe Cyprus is one big money laundromat for Russian crooks, and proposing to bail them out is not a vote winner.
The debt implications of a Cyprus rescue certainly look alarming. Unless the country gets financing by June, when the government has to pay a 1.4 billion-euro ($1.9 billion) bond redemption, it will default. By most estimates, preventing this would require a bailout of about 17 billion euros, from which 10 billion euros would go to recapitalizing the island’s banks.
Spread out over four years, lending Cyprus this amount of money would push the country’s public-debt burden to a whopping 140 percent or 150 percent of gross domestic product in 2016, from 84 percent of GDP last year.
Concerned about the sustainability of such a burden, international creditors have been looking for ways to reduce the size of the bailout. One option mooted is to reduce the state’s funding needs by writing down private creditors’ holdings of Cypriot sovereign bonds. Another is to reduce the funding needs of commercial banks, by writing down uninsured deposits.
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