The future of Cypriot finances
has been thrown into greater doubt than ever, and today hangs precariously in the balance.
Last week, Cypriot Finance
Minister Vassos Shiarly stated publicly that he expected to have concluded bailout
talks with the troika of lenders (IMF, ECB and European Commission) within a
month, and the expectation was that Cyprus would request from the troika a
smaller bailout than had previously been mooted, in order to avoid having to
concede a 20 page long list of demands from European financiers.
Details of the strings to be
attached to a bail-out were leaked recently, and included an unpalatable series
of measures to raise taxes and slash public spending. As a consequence, Cyprus instead focused on
trying to secure a short-term loan from Russia which it believed would come
with fewer overt string attached, but which would be based on a 'political'
understanding.
Last year, Russia provided Cyprus with a four and-a-half
year loan of EUR2.5 billion (around 14% of the country's gross domestic
product) after Cyprus was effectively frozen out of international debt markets,
and there is therefore a precedent for the Russians helping out the small
Island. In the current round of
negotiations it is understood that a further EUR5 billion of loans had been
requested and the noises coming out of Cyprus were fairly optimistic in the
past week or so that the loan would go ahead, but now it appears that chances
of this are fading. It seems that the
Russians are worried about the ability of the Island to repay a loan which
represents such a high proportion of its GDP, and sources involved in the negotiations
are expressing serious doubts that the loan will go ahead. This would leave the Cypriot government, which
is believed to have enough cash to last only until November, forced to concede
the troika’s demands in order to secure EU funds.
Reports of the EU proposals
say that under a full European bailout, the nation's wealthy residents would
suffer additional taxes on real estate holdings, accumulated wealth, and income
and the Island would also face an increase in VAT and extra duty on cigarettes
and alcohol. These would undoubtedly all
be highly unpalatable measures for the Cypriot government, and would be made
worse by the fact that at the same time the troika would seek a 15% cut in
public sector salaries, an end to the “13th month” end of year bonus
and a raft of public sector job losses.
No doubt frantic attempts will
continue over the next weeks to avoid this scenario, but the chances of success
seem to be waning.
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