14/01/2013 07:23
The rescue of Cyprus has become one of the most difficult and complicated cases for the European partners.
Although it is only 0.2% of the European GDP, its support has received much bigger dimension, causing significant dilemmas for its European partners.
The systemic dimension of Cyprus is already evidenced by the extensive coverage of the developments from foreign media, linking Cypriot memorandum with the wider developments in the eurozone.
Cyprus, as analyzed in the New York Times and the Wall Street Journal, might jeopardize the peace that began to be created in the eurozone.
The problem is the size of the support, which reaches 100% of the Cypriot GDP. The huge local banks and their capital needs make debt sustainability difficult, bringing to the surface disagreements among the creditors on how to reduce it.
One solution, which is the direct recapitalization from the support mechanism, makes Cyprus a 'battleground' between Germany and the International Monetary Fund. Despite the commitments of the European leaders in the summer, this solution does not go as expected due to German objections. The Cypriot memorandum gives the IMF the ability to bring back the direct recapitalization issue, delaying a final decision on Cyprus.
The other solution, the haircut of the Cypriot bonds, is equally problematic. The European leaders had said in October 2011 that the Greek PSI is unique and non-repetitive. The potential differentiation of this commitment may raise concern to the markets with unpredictable consequences. Besides, about half of the Cypriot debt is held by Cypriot banks, which will need additional funds for any loss incurred.
The haircut of Russian creditors of the Cypriot banks appears to have been discussed by the Finance Ministers but was abandoned when it became clear that they might give wrong signals to the euro area banks. Besides, this did not apply even in the case of Ireland, when the amounts were much larger.
Things become more complicated by elections in Cyprus and Germany. The presidential elections seem to postpone the finalization of the Cypriot Memorandum, because creditors want to clear up the political scene before signing. Demetris Christofias is adamant on privatizations - a point which is important in order to make debt sustainable.
Germany is in the mood of elections too. In the state of Lower Saxony, current Christian Democrat governor is struggling to hold on to power in the elections of January 20. With the Liberal Party facing the possibility of non-participating in the Parliament because of collapsing rates, the German Chancellor fears a disruption of the momentum gained by the party. The Lower Saxony can be a miniature of the national elections in September: The Christian Democrats to dominate with a rate of more than 40%, but not be able to form a government following the collapse of the liberals and their non-representation in the lower house. The Sunday elections can also reverse the balance in the upper house of Germany to the burden of the Christian Democrats and to the benefit of the Social Democrats and the Greens.
German politicians from almost all political parties have already stated their view on the Cypriot Memorandum complicating even more the European processes. Connecting the memorandum with the support of the Russian oligarchs, German politicians run the risk of being self-trapped in a rhetoric that could make the support of Cyprus and the stability in the eurozone more difficult.
It is no coincidence, perhaps, that the German Chancellor has avoided reports on issues raised by other German politicians on money laundering and Russian oligarchs. The German Chancellor might know better than anyone else that any complication on Cyprus may raise concerns to the markets, which currently seem to be watching the developments on Cyprus with great interest but also distance.
Although it is only 0.2% of the European GDP, its support has received much bigger dimension, causing significant dilemmas for its European partners.
The systemic dimension of Cyprus is already evidenced by the extensive coverage of the developments from foreign media, linking Cypriot memorandum with the wider developments in the eurozone.
Cyprus, as analyzed in the New York Times and the Wall Street Journal, might jeopardize the peace that began to be created in the eurozone.
The problem is the size of the support, which reaches 100% of the Cypriot GDP. The huge local banks and their capital needs make debt sustainability difficult, bringing to the surface disagreements among the creditors on how to reduce it.
One solution, which is the direct recapitalization from the support mechanism, makes Cyprus a 'battleground' between Germany and the International Monetary Fund. Despite the commitments of the European leaders in the summer, this solution does not go as expected due to German objections. The Cypriot memorandum gives the IMF the ability to bring back the direct recapitalization issue, delaying a final decision on Cyprus.
The other solution, the haircut of the Cypriot bonds, is equally problematic. The European leaders had said in October 2011 that the Greek PSI is unique and non-repetitive. The potential differentiation of this commitment may raise concern to the markets with unpredictable consequences. Besides, about half of the Cypriot debt is held by Cypriot banks, which will need additional funds for any loss incurred.
The haircut of Russian creditors of the Cypriot banks appears to have been discussed by the Finance Ministers but was abandoned when it became clear that they might give wrong signals to the euro area banks. Besides, this did not apply even in the case of Ireland, when the amounts were much larger.
Things become more complicated by elections in Cyprus and Germany. The presidential elections seem to postpone the finalization of the Cypriot Memorandum, because creditors want to clear up the political scene before signing. Demetris Christofias is adamant on privatizations - a point which is important in order to make debt sustainable.
Germany is in the mood of elections too. In the state of Lower Saxony, current Christian Democrat governor is struggling to hold on to power in the elections of January 20. With the Liberal Party facing the possibility of non-participating in the Parliament because of collapsing rates, the German Chancellor fears a disruption of the momentum gained by the party. The Lower Saxony can be a miniature of the national elections in September: The Christian Democrats to dominate with a rate of more than 40%, but not be able to form a government following the collapse of the liberals and their non-representation in the lower house. The Sunday elections can also reverse the balance in the upper house of Germany to the burden of the Christian Democrats and to the benefit of the Social Democrats and the Greens.
German politicians from almost all political parties have already stated their view on the Cypriot Memorandum complicating even more the European processes. Connecting the memorandum with the support of the Russian oligarchs, German politicians run the risk of being self-trapped in a rhetoric that could make the support of Cyprus and the stability in the eurozone more difficult.
It is no coincidence, perhaps, that the German Chancellor has avoided reports on issues raised by other German politicians on money laundering and Russian oligarchs. The German Chancellor might know better than anyone else that any complication on Cyprus may raise concerns to the markets, which currently seem to be watching the developments on Cyprus with great interest but also distance.
Related Articles
